Affordable Life Insurance Protection for Your Family

What Type of Life Insurance Do I Need for a Mortgage?

Life Insurance for Mortgage Protection

Do I Need Life Insurance for a Mortgage Loan?

The answer is "No". You don’t need life insurance in order to get a mortgage loan to buy a home or condominium.

Don't Confuse Life Insurance with Private Mortgage Insurance (PMI)

While the names sound similar, mortgage protection insurance and private mortgage (PMI) are completely different products.

PMI protects the lender (bank), not you. If you put down (down payment) less than 20% on your home, you pay monthly premiums to a PMI policy that will pay your lender if you default (unable to make your monthly payments).

If you die, your heirs will continue to owe the mortgage payments and would have to default on them before PMI kicks in.

If anyone depends on your income, be sure you purchase life insurance to help them pay the mortgage and other expenses after your death.

Mortgage Protection Insurance in Addition to Life Insurance?

Mortgage protection insurance companies might try to convince you that you need their protection plan in addition to life insurance.

MPI carriers may suggest paying off the mortgage will use up most of your life insurance proceeds, leaving much less for your survivors to meet their basic living expenses.

But if you don’t think you have enough life insurance, you should buy more; it will probably cost less to increase that life insurance coverage than to purchase a separate mortgage protection insurance policy.

Also, mortgage protection insurers suggest your survivors would have to pay off the mortgage loan if you died unexpectedly. That isn’t always the case and isn’t necessarily the best use of life insurance proceeds.

Is Mortgage Protection Insurance Really Needed?

Financial experts usually don’t recommend any insurance product that only helps to pay certain bills.

If you’re concerned about your spouse or children inheriting a mortgage they might not be able to pay, term life insurance is the best option for those who qualify for coverage.

Even though some mortgage protection policies are more flexible now, people should consider term insurance and other options before choosing mortgage protection life insurance.

What If You Die Suddenly?

Would Your Family Be Able to Continue Paying the Mortgage and Maintain the Same Quality of Life?

The solution banks and lenders offer is a program claiming to protect your family in case of an unexpected tragedy by paying off your home mortgage loan.

It’s called a mortgage protection program or mortgage protection life insurance.

Without this plan, they say your family would still have to make your monthly mortgage payments.

But mortgage protection insurance (MPI) is really just a type of life insurance.

It’s sold by banks affiliated with lenders and by independent insurance companies that obtain information about your mortgage from public records.

Policy terms and conditions vary by state and by insurance company, so the information provided here is meant to be a general overview and may not precisely reflect the terms of any specific policy.

That being said, most people don’t need mortgage protection life insurance.

Lack of Flexibility with Some Mortgage Protection Insurance Policies

With regular term life insurance, your survivors or caretakers can use the money they receive as they see fit.

Under some traditional mortgage protection insurance policies—particularly those purchased through your lender—the insurer sends the benefit payment directly to your lender so your beneficiaries never see it at all.

A better option is a mortgage protection policy that pays your loved ones directly. More and more policies do, so be sure that's the kind you get if you choose this product.

MPI Has Higher Premiums Compared to Regular Term Life Insurance

If you’re healthy and have never used tobacco, you’ll usually pay more for mortgage protection insurance than you would for term life insurance.

The main reason for not buying the MPI is the cost.

It typically offers a declining amount of insurance coverage for a cost that is higher than a term life policy.

You can get level term protection for a lower cost with term insurance.

Unlike other types of insurance, it’s difficult to get a quote for mortgage protection insurance online.

Prices for mortgage protection insurance can vary widely; there is less transparency in this market and there are too many variables to accurately compare prices.

But here is one example of the difference in payment:

For a 35-year-old male nonsmoker living in New York, a 30-year mortgage life insurance policy from State Farm might cost $775 per year. If he qualified for the best rates on a 30-year term life insurance policy, he might pay $355 per year; if he qualified for the worst rates on the same policy, he might pay $687 per year.

These prices are subject to underwriting, which may require a medical examination of the applicant for coverage.

What’s more, the premiums on the mortgage protection policy might only be fixed for the first five years, then they could go up or down.

You’ll have to consult the insurance policy to see how high the premiums could get.

By contrast, the term life insurance policy has fixed premiums for up to 30 years, which means there is no increase in your cost of coverage for the duration of your term policy.

Declining Payout If You Buy the Wrong Kind of Insurance Policy

Many mortgage protection policies do offer level premiums for the policy’s duration, meaning your premiums will stay the same.

This feature sounds great, except that with many policies the coverage these consistent premiums buy you will shrink over time as the potential payout decreases.

This type of mortgage protection life insurance is referred to as decreasing term insurance.

Here's the reasoning: The insurance is designed to pay off your mortgage balance, and each month you pay down part of your mortgage principal.

Therefore, the mortgage protection insurance policy’s potential payout shrinks every time you pay your mortgage.

Instead, look for the newer type of mortgage protection product where the payout doesn’t decline; this feature is called a level death benefit.

What it means is if you're covering a $250,000 mortgage, your beneficiary (not the lender) will receive the whole $250,000, even if the mortgage debt has declined to $75,000.

If you pay off the mortgage while the policy is still in effect, some policies allow you to convert your mortgage insurance into a life insurance policy.

Who Might Benefit from Your Policy?

Some people don't qualify for term life insurance because of their medical history or current poor health, and they aren’t eligible for a group policy that doesn’t require medical underwriting (employer life insurance may not require a medical exam, for example).

For these individuals, mortgage protection insurance could be a useful alternative.

MPI is usually sold without underwriting, so if you are unable to get term life insurance, MPI might make sense.

If that fits your situation, get price quotes from several companies—not necessarily the ones that sent you letters through the mail offering to sell you mortgage protection coverage.

Any time you purchase insurance, check the firm’s financial strength rating with A.M. Best, a company that gives insurers a letter grade to help consumers evaluate whether the insurer will be able to pay them if they file a claim.

No Exam Term Life Insurance Option

To avoid a declining-payout MPI policy, you might be better off with a no-medical-exam (also called guaranteed issue) term policy with level premiums and a level death benefit.

These policies cost more and sometimes have lower coverage than term policies that review your health and medical history, but they’ll pay the same benefit whether you die five or 25 years into your mortgage.

Another possibility: Mortgage protection insurance could offer more coverage at a better price earlier in your mortgage term, but once you’ve paid down the principal significantly, you might be better off switching to a guaranteed issue term policy.

If you cannot qualify for term insurance, be sure to shop around. Compare the fine print to see what you’re really getting for your money. While there are scams out there, it is a legitimate, albeit expensive, product. Not all policies are equal.

Two More Important Issues for MPI

Age Limits

Like many other types of life insurance, mortgage protection insurance may not be available after a certain age.

State Farm, for example, only offers 30-year mortgage protection insurance to applicants age 45 or younger; the age limit is 36 in New York. You’ll need to be 60 or younger to get a 15-year policy.

Don't Confuse It with Private Mortgage Insurance

While the names sound similar, mortgage protection insurance and private mortgage insurance (PMI) are completely different products.

PMI Coverage

PMI protects the lender, not you. If you put down less than 20% on your home, you pay monthly premiums to a PMI policy that will pay your lender if you default.

If you die, your heirs will continue to owe the mortgage payments and would have to default on them before the private mortgage insurance kicks in.

If anyone depends on your income, be sure you purchase life insurance to help them pay the mortgage and other expenses after your death.

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