Mortgage protection insurance agents are like sniffing dogs hot on the trail of blood. They pounce on you the minute you sign on the dotted line of a mortgage loan for your new home. But before you decide to buy that MPI, weigh the pros and cons and consider factors like the amount of your loan, your health, age and financial status.
The purpose of mortgage protection insurance is to ensure that your mortgage will be paid off if you die, become incapacitated or lose your job. You don’t have to worry about your family being left homeless because you are unable to keep up with payments for the above reasons. But, as all insurance policies go, you have to pay the monthly or quarterly premiums, depending on the terms agreed upon in the contract.
On the surface, MPI is a very nice policy to have. It gives you peace of mind that your death or disability will not unduly affect your loved ones’ financial circumstances and living conditions. But there are disadvantages to MPI that you won’t know about, especially if your agent takes pains to avoid talking about them. Here are the important things you should know.
Pros:
- It has very high acceptance probability of acceptance.
Purchasing mortgage protection insurance is usually on a guaranteed acceptance basis. Very few questions will be asked and no medical underwriting is needed in most cases. Generally, most firms that provide MPI will issue coverage up to the age of 50. But you can find others that will issue coverage up to 60 or 70 years old and, with a medical exam, even up to 80 years of age. Naturally, insurance coverage will cost more and benefits will be limited as you grow older.
Mortgage protection insurance premiums are calculated upon acceptance. They go up as you grow older but unlike auto insurance, MPI is not affected by negative behavior such as facing a hit and run penalty charge or DUI.
People with health issues and are insurable at very high rates or those who are in risky occupations and can’t get disability insurance will find the mortgage protection insurance a big help.
Cons:
- The benefits decline over time.
Mortgage protection insurance pays off all or part of the balance in your mortgage depending on the cause of your inability to pay, which could be death, disability or job loss. If none of these things happen and you are faithfully paying off your loan monthly, the balance of your mortgage decline. Should the unfortunate event happen 20 years after you have been paying your loan, and you took out a $200,000 MPI, the insurance company will only pay the remaining balance, which could be significantly lower. In spite of the decreasing benefit, you’ll still be paying the same premium on your MPI.
In contrast, life insurance keeps its face value throughout the term and your beneficiary will receive the full amount regardless of how much premium you have paid.
- The benefits will be paid directly to your lender.
A mortgage protection insurance policy is for the payment of a mortgage loan. Hence, the insurance firm will give the payment to the lender and the family will not get to see the money. They cannot use it for other needs, like the kids’ education or put it in an investment with high yields. In life insurance, your family or beneficiaries receive the benefits and use them as they see fit.
- MPIs are generally more expensive than life or term insurance.
Mortgage protection insurance quotes are seldom available online and the numerous variables prohibit accurate comparison between MPI and life insurance. But a simple example is of a 35 year old male, nonsmoker and living in New York. A 30-year MPI policy from State Farm will cost him around $755 a year in premium payments. The same male will pay only $345 a year on a life insurance policy for the best rates. A life insurance however will need the insured to undergo a medical exam.
