After closing on a mortgage, many individuals immediately begin receiving daily solicitations in the mail, urging them to purchase mortgage protection life insurance (MPI). Simply put, MPI is a type of life insurance sold by banks affiliated with lenders, and by independent insurance companies, who obtain information about a person's mortgage through public records.
MPI solicitations are often disguised as official requests from mortgage lenders, replete with convincing details, such as the lender’s and borrower's names, the loan type, and the amount owed. In bold lettering, these documents lead with alarmist headlines like:
- IMPORTANT NOTICE! PLEASE COMPLETE AND RETURN!
- FINAL NOTICE! MORTGAGE PROTECTION CARD!
- NOTICE OF OFFERING! MORTGAGE FREE HOME PROTECTION!
These declarations are often followed by scare tactic statements such as, “If you died tomorrow, would your family be able to continue paying the mortgage and maintain their qualities of life?” Finally, these solicitations present solutions, by offering programs claiming to protect families, in the wake of tragedy, by paying off mortgages.
- Mortgage protection life insurance (MPI) is life insurance sold by banks affiliated with lenders, who obtain information about your mortgage from public records.
- Mortgage protection life insurance companies solicit business by telling those who owe mortgages that their loved ones will face financial hardship without such policies in place.
- Such products have disadvantages, like high premiums and lack of transparency.
- These products may attract those who wish to acquire policies because they are in poor health or have poor medical histories.
Do You Need Mortgage Protection Life Insurance?
In truth, mortgage protection life insurance policies are generally ill-advised, for the following reasons:
- Lack of flexibility: Unlike regular term life insurance, where beneficiaries may use insurance payouts as they see fit, most mortgage protection insurers send benefit payments directly to lenders, so your beneficiaries never see any money.
- High premiums: If you’re a healthy individual who has never smoked tobacco, MPI is usually costlier than term life insurance.
- Lack of transparency: Unlike other types of insurance, it’s difficult to obtain quotes for MPI online, which is a major concern since mortgage MPI prices can vary widely.
- Fluctuating premiums: Unlike term policies, which charge fixed premiums for 30 years with no surprise price increases, premiums on MPI policies might only be fixed for the first five years, after which time they could spike at an time.
Beware of Dwindling Payout
Some MPI policies do in fact offer policies that charge fixed premiums for the policy’s duration. However, in many cases, the payout on these policies may shrink over time as potential payouts decrease. This type of mortgage protection life insurance, which is sometimes referred to as "decreasing term insurance," is designed to pay off your mortgage balance, while each month your beneficiary pays down part of your mortgage principal. Consequently, the MPI policy’s potential payout shrinks with every mortgage payment.
On the other hand, some newer MPI products have a feature known as a "level death benefit," where payouts don’t decline. For example, if you're covering a $100,000 mortgage, your beneficiary (not the lender) would receive the whole $100,000, even if the mortgage debt has declined to $65,000. And 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.
Some MPI policies will return your premiums if you never file a claim after you pay off your mortgage. However the premiums returned to you will likely be worth far less, as inflation will have eroded their value. Plus, you will have likely squandered the chance to invest any money you would have saved, had you purchased cheaper term life insurance.
So Who Would Benefit?
Mortgage protection insurance might benefit those who don't qualify for term life insurance because of poor current health since MPI is typically sold without underwriting. In these cases, MPI candidates should seek quotes from several companies and check each firm's financial strength rating with A.M. Best, a rating company that ranks insurers with letter grades.
Those seeking to avoid declining-payout MPI policies should opt for no-medical-exam term policies (also called guaranteed issues) with level premiums and level death benefits. Although these policies cost more and may offer lower coverage than term policies that review medical histories and conduct physical exams, at least they’ll pay the same benefit, whether you die 10 or 25 years into your mortgage.
Another possibility is to acquire a mortgage protection insurance policy that offers more coverage for a cheaper price, earlier in your mortgage term. Once you’ve paid down the principal significantly, consider switching to a guaranteed issue term policy.
As with other types of life insurance, mortgage protection insurance may not be available after a certain age. State Farm only offers 30-year mortgage protection insurance to applicants of age 45 or younger (36 or younger in New York), and only offer 15-year policies to those 60 or younger.
Different from PMI
Mortgage protection insurance differs entirely from private mortgage insurance (PMI), which protects lenders, 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 should you default. However, in the event of your death, your heirs must continue making mortgage payments, and PMI only kicks in if family members default.
The Hard Sell
Mortgage protection insurance purveyors preach the importance of adding their product to existing life insurance coverage, by convincing you that the life insurance payouts will be eaten up by mortgage payments, leaving your loved ones in the financial lurch. But a better remedy is to simply buy more life insurance.
The Bottom Line
Those concerned about leaving behind expensive mortgages to their loved ones should consider term life insurance, which is a typically superior solution to mortgage protection life insurance.