Immediately after a mortgage closes, many people start receiving daily requests in the mail, urging them to purchase Mortgage Protection Insurance (MPI). In a nutshell, MPI is a type of life insurance that is sold by affiliated banks to independent lenders and insurance companies. They obtain information about a person’s mortgage through public records.
Tactics used to get people to buy an MPI
MPI applications are often disguised as official messages from mortgage lenders, packed with convincing details, such as the names of the lender and borrower, the type of loan, and the amount owed. Usually in bold, these documents carry alarmist headlines such as:
- IMPORTANT ANNOUNCEMENT! PLEASE COMPLETE AND RETURN
- FINAL NOTICE! MORTGAGE PROTECTION CARD
- WARNING! HOME PROTECTION WITHOUT MORTGAGE
These statements are often followed by messages such as, “If you were to die tomorrow, would your family still be able to pay the mortgage and maintain their quality of life?” Finally, these applications present solutions, offering programs that claim to protect families, after the tragedy, by paying mortgages.
Do you really need mortgage life insurance?
Actually, insurance policies of life mortgage protection are generally inadvisablefor the following reasons:
- Lack of flexibility: Unlike term life insurance, where beneficiaries can use insurance payments as they see fit, most mortgage protection insurers send benefit payments directly to lenders, so your beneficiaries never see the money
- High premiums: If you are a healthy individual who has never smoked tobacco, MPI is typically more expensive than term life insurance.
- Lack of transparency: Unlike other types of insurance, it is difficult to get quotes online for an MPI, which is extremely important as prices can vary widely.
- Fluctuating Premiums: Unlike term policies, which charge fixed premiums for 30 years with no big price increases, MPI policy premiums can only be fixed for the first five years, after which they can increase at any time.
Beware of lower payments
Some MPIs actually offer policies that charge fixed premiums for the duration of the policy. However, in many cases, the payout on these policies can be reduced over time as potential payouts decline. Sometimes called “declining term insurance,” this type of mortgage protection life insurance is designed to pay off the mortgage balance, while each month the beneficiary pays a portion of the principal on the mortgage. Consequently, the potential payment of the MPI policy is reduced with each mortgage payment.
On the other hand, Some newer MPI products have a feature known as a “level death benefit,” where payments do not decrease. For example, if you are paying off a $100,000 mortgage, your beneficiary (not the lender) would receive the full $100,000, even though the mortgage debt has decreased to $65,000. And if you pay off the mortgage while the policy is in force, some policies allow you to convert mortgage insurance into a life insurance policy.
- Mortgage protection life insurance (MPI) is life insurance sold by affiliated banks to lenders, who obtain information about mortgages from public records.
- Mortgage protection life insurance companies base their tactics on telling people with mortgage debt that their loved ones will face financial hardship if they don’t purchase their policies.
- These products have drawbacks, such as high premiums and a lack of transparency.
Some MPI policies will return your premiums if you never file a claim after paying off the mortgage.
However, the returned premiums are likely to be worth much less, as inflation will have eroded their value. In addition, you may have missed the opportunity to invest the money you would have otherwise saved by purchasing cheaper term life insurance.
So who would benefit?
Mortgage life insurance could benefit those who don’t qualify for term life insurance, since MPI is typically sold without underwriting.
In these cases, MPI candidates should seek quotes from multiple companies and check each firm’s financial strength rating with AMBest, a rating company that rates insurers by letter grades.
Those who want to avoid the decline in MPI policies should opt for no-medical term policies (also called guarantees) with level premiums and level death benefits. Although these policies cost more and may offer lower coverage than term policies that require medical records and physicals, they will at least pay the same benefit whether you die within 10 or 25 years of your mortgage.
Another possibility is to purchase a mortgage protection insurance policy that offers more coverage for a cheaper price, earlier in the term of the mortgage.. Once you’ve made the principal payment, you may want to 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. For example, State Farm only offers 30-year mortgage protection insurance to applicants age 45 and under (36 and under in New York), and only offers 15-year policies to those age 60 and under.
It is not the same as the PMI
Here’s how it works: If you make a down payment that is less than 20% of the total mortgage amount, you end up paying monthly premiums on a PMI policy that will pay the lender in the event of default. However, should you die, your heirs must continue to make mortgage payments, and PMI only kicks in if family members default.
It’s hard insurance to sell
Mortgage life insurance providers preach the importance of adding their product to existing life insurance coverage, trying to convince prospective customers that life insurance payments will be eaten up by mortgage payments. This would leave your loved ones in the financial lurch. However, a better remedy to this situation is simply to purchase life insurance.
Is it worth buying mortgage protection insurance?
Whether it’s a condo, a development, or a beautifully landscaped suburban spot, your home is more than just four walls and a roof. Even if it’s a work in progress or a house you plan to sell in a few years, Protecting your investment is a must.
If you were to die too soon, you wouldn’t want your family to struggle with the house payment and risk losing the stability and financial benefits that home ownership offers.
For most people, mortgage insurance protection it’s not worth it because you can get more value from term life insurance.
Unlike mortgage life insurance, a term life policy offers more flexibility, customization, and financial protection than mortgage life insurance. With term life insurance, you can choose the amount of coverage and decide who will get the coverage if you die. Your beneficiary or beneficiaries could then choose how to spend the coverage to best protect their family, rather than having the benefit go to your mortgage lienholder.