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Does Mortgage Protection Insurance Cover Death

Understanding Mortgage Protection Insurance for Homeowners
Written by
September 2, 2022
/
5
min read

The most impactful investment one can make in life is purchasing a home. As such, homeowners want to ensure they can fulfill mortgage obligations without burdening their families, even if they pass away before paying off the loan. 

One solution is mortgage protection insurance (MPI).

MPI is insurance that, unlike other policies, does not provide a payout to the beneficiaries but instead has the sole purpose of paying off the mortgage after the borrower dies. Having the benefit go to the lender may not seem ideal, but MPI can help your family, for instance, by avoiding foreclosure.

Below are extensive guidelines on mortgage protection insurance that can determine whether such a policy is appropriate.

How Does Mortgage Protection Insurance Work

How MPI operates is similar to term life insurance. Many companies even market this product as mortgage life insurance. The policyholder pays a monthly premium to ensure mortgage coverage throughout the term. MPI is often issued to cover the same length as the claimant's home loan but is also available in shorter-year increments. 

If the policyholder passes away during their coverage, the insurance company pays the lender a death benefit worth a set number of payments. The terms of the MPI policy, including the number of disbursements, are decided beforehand. Some companies are known to cover the remaining mortgage, but that varies by insurer. MPI may also cover expenses in the event of disability or unemployment.

 

Other Forms of Mortgage Insurance

Mortgage protection insurance should not be confused with other mortgage insurance. While some are required, they do not provide a benefit to your family if you pass away before the mortgage is paid off. Learn about these other forms of insurance below.

  • Homeowners Insurance: Mortgage providers mandate a home insurance policy as a condition for approval. It protects the borrower from financial loss by covering their home, personal items, and liability in the case of damage, injury, theft, and natural disasters to the property.
  • Private Mortgage Insurance (PMI): Required for homebuyers making less than a 20 percent down payment on a conventional home loan to balance out the lender's increased risk. The cost of PMI premiums ranges between 0.25 and 2.25 percent of the total mortgage and is due monthly. 
  • FHA Mortgage Insurance: Federal Housing Administration lenders require an initial and annual mortgage insurance premium (MIP) to protect them from loss if the borrower’s loan defaults. Depending on the amount of the down payment, MIP can last for 11 years or the life of the loan.
  • USDA Mortgage Insurance: Loans issued by the United States Department of Agriculture are beneficial because they do not require a down payment. Since that is riskier, this insurance charges an upfront fee worth one percent of the loan and a following 0.35 percent premium.

 

Life Insurance versus Mortgage Protection Insurance

For individual circumstances, mortgage protection insurance can be a great way to protect one's home if the inevitable occurs. Alas, it is not the sole option. Traditional life insurance policies, in particular, have several parallels to MPI, from how they manage payments to the general purpose they each serve. 

Taking note of the differences as opposed to the resemblances of these two insurance policies is essential when shopping for lenders. Following is a breakdown of three distinctions between life insurance and MIP: 

Who Is the Beneficiary?

Perhaps the most significant discrepancy between the two policies is who gets recognized as the beneficiary. With standard term life insurance coverage, the policyholder's family is the beneficiary, obtaining a lump sum of cash. As for MPI, the beneficiary is the mortgage lender, and its sole purpose is to pay off the loan's balance.

Some homeowners may view MPI as advantageous because it ensures the funds go toward maintaining their family's residence. The downside is that the family cannot rely on mortgage protection insurance to pay bills, property taxes, funeral costs, and expenses a life insurance policy can cover.

Comparing Insurance Premiums and Acceptance Rates

When applying for life insurance, the buyer's acceptance and premium rates depend on several aspects, from health to their line of work. This information gets reviewed through background and credit checks and a medical exam during the underwriting process. With MPI, buyers can skip them. That implies these plans offer guaranteed acceptance but often at the cost of higher premium amounts.

Policyholders with high-risk occupations or certain medical conditions may find MPI easier to secure at reasonable rates. But that also means the average MPI premium is more expensive than a life insurance plan of equal value. As a result, those in good health with reliable jobs may pay more for less coverage.

 

Policy Regulations and Requirements

Several restrictions on MPI policies might alter one's benefits. For instance, most MPI plans include a provision stating that the death benefit balance adheres to the mortgage balance. As payments get made, the outstanding debt decreases. Therefore, the policy's value decreases the longer you keep it. That contrasts with life insurance policies, which maintain the same balance throughout the term.

Also, rigid rules limit when MPIs can be purchased. Most insurers prefer homebuyers to obtain a policy within 24 months after closing, but some companies offer them up to five years. Insurance providers sometimes deny coverage based on age because senior property owners are more likely to receive a payout.

Where Can Homeowners Get Mortgage Protection Insurance

If MPI aligns with your goals, comparing policies amongst various providers is next. Choosing the proper plan is critical, as is deciding who to buy it from. There are several places to find an MPI policy, such as:

 

  1. Mortgage Lender: Lenders often offer mortgage protection insurance plans during closing. Bundling all mortgage expenses can be beneficial. While this may be the first place worth looking at, not all lenders provide MPI services. If that’s the case, ask your realtor for a referral.
  2. Insurance Provider: Some folks consider the company responsible for their other policies. Many firms that provide life insurance also offer MPI. Combining multiple insurance coverages could result in further savings. 
  3. A Private Insurance Company: Some private companies specialize in mortgage protection insurance and offer customized policies. The availability of these firms varies depending on the state.

 

If interested, acquiring an MPI policy should be a priority after closing on a home loan. Most providers allow a limited time following the closing date. Missing that window may restrict eligibility. In that case, consider term life insurance instead.  

 

Is Mortgage Protection Insurance Worth It

Mortgage protection insurance is optional. 

An MPI policy could make sense for those who may not fulfill their mortgage payments if they were to pass away. Alas, having a life insurance policy to pay off the home loan, final expenses, and supplemental income might relegate MPI to being less useful. The same goes for those in good health and secure employment.

If unsure whether MPI is appropriate, consult with a Wesley Mortgage representative to determine whether mortgage protection insurance is advisable.

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