An unfortunate fact of life is that your debt doesn’t disappear when you die. Your heirs can inherit some types of debt, along with any positive financial legacy you leave.
If you have a mortgage, someone will remain responsible for paying it if you die — such as your spouse, if they’re a co-borrower or co-signer on the loan, or your children. They’ll have to assume responsibility for monthly payments or sell the house to cover the debt.
A hefty mortgage balance could become a huge burden for your loved ones in these circumstances. To avoid leaving it behind, some people purchase mortgage protection insurance, a type of insurance that pays off your mortgage if you die.
Mortgage Protection vs. Term Life
A lot of experts say mortgage protection insurance is unnecessary because your beneficiaries can cover your mortgage debt with a basic term life benefit or proceeds from the sale of the home.
Mortgage protection policies have their place, however, so don’t write them off immediately when choosing your life insurance coverage. First, consider your family’s circumstances and financial needs, and how both term life and mortgage protection could apply to them.
What Is Term Life Insurance?
Term life insurance is a policy that pays out a set benefit amount to your designated beneficiaries in case you die.
A term life policy covers you for a set number of years — the “term” — unlike whole life insurance, which gives lifetime coverage. You typically purchase a term life policy for 5, 10, 15, 20, 25, or 30 years, and your beneficiaries can receive the death benefit if you die anytime within the term. After the term ends, you have to purchase another policy to continue coverage.
You have to qualify to receive life insurance. Whether you’re accepted and how much you pay for premiums depends on several factors, including your age and health.
Traditionally, purchasing life insurance required a medical exam to assess your health, but now many online life insurance companies can help you find a policy with no medical exam. No matter what, you could have trouble getting basic life insurance coverage if you’re in poor health, smoke cigarettes, or engage in high-risk hobbies like skydiving.
Life insurance companies let policyholders expand their coverage through life insurance riders, which can increase the payout amount, expand the types of events that are covered, or both. Common riders include coverage for accidental death and dismemberment, long-term care, and return of premiums. Riders don’t cover mortgage payments.
Does Life Insurance Cover Mortgage Insurance?
Life insurance can pay off a mortgage, but it isn’t the same thing as mortgage insurance. The payout amount isn’t guaranteed to cover your mortgage debt, and it won’t go directly to your lender.
Recipients can use a life insurance death benefit to pay for anything. They receive the money as a lump sum, so they can put it toward whatever costs they need it for, such as your funeral costs, monthly bills, or debts like a mortgage.
Term Life Insurance Rates
Life insurance premium rates vary from person to person, depending on:
- Your age
- Your health
- How much coverage you need
- The length of the term
- Your lifestyle, including habits like smoking or high-risk activities
Generally, a young person in good health can get relatively cheap term life insurance compared with an older person or anyone in poor health. A shorter term is likely to get you a lower rate because the chance of your circumstances changing is smaller in a shorter period.
What Is Mortgage Protection Insurance?
Mortgage protection insurance (MPI) — sometimes known as mortgage payment protection or mortgage life insurance — is designed to cover your mortgage debt in case you lose your job, become disabled, or die.
Depending on the type of policy you purchase, MPI is similar to long-term disability insurance or term life insurance, but it only covers your outstanding mortgage debt.
MPI only pays out the amount necessary to pay off your mortgage, so the benefit amount goes down over time as you make mortgage payments. If you die, the MPI benefit payment goes directly to your mortgage lender to satisfy your remaining mortgage balance. Compare that to life insurance, which pays out a flat benefit amount to your beneficiaries.
MPI tends to be easier to qualify for than life insurance and doesn’t typically require a medical exam, so you may be able to get this type of coverage even if your age or health disqualify you from a basic life insurance policy.
Many mortgage lenders sell mortgage protection insurance. You can also purchase it from a life insurance company or other insurance provider.
What Does Mortgage Protection Insurance Cover?
Unlike life insurance, a mortgage protection insurance benefit only covers mortgage debt. The payout is equal to the amount needed to pay off your outstanding mortgage, and the payment goes directly to the lender, not a beneficiary.
Depending on your policy, MPI could pay out for a set amount of time if you become unable to work due to injury or disability or if you die.
What Mortgage Protection Insurance Does Not Cover
Mortgage protection insurance only pays your remaining mortgage debt. It’s not a substitute for these other types of insurance homeowners often have to buy:
- PMI. Private mortgage insurance protects a lender in case you don’t repay the loan. You’re usually required to purchase it and pay alongside your monthly mortgage payments if you put less than 20% down when purchasing a home, and it goes away after you’ve paid off at least 20% of the home’s value.
- Mortgage Premium Insurance. Even though this is also abbreviated “MPI,” it’s not the same as mortgage protection insurance. This is insurance you pay if you take out an FHA home loan. Like PMI, it protects the lender in case you don’t repay the loan.
- Homeowners Insurance. This protects your finances in case of damage or theft to your home under restricted circumstances. It doesn’t cover mortgage payments.
Mortgage Protection Insurance Rates
Like life insurance, MPI rates vary depending on your age and health. In the case of mortgage disability insurance, the industry you work in is also a factor because of the varying levels of risk in different types of jobs.
MPI rates are often higher than term life insurance rates, so compare your options. You may be to increase your life insurance coverage to receive the same benefit with lower total monthly premiums.
The biggest drawback to mortgage protection insurance is that the premium rate stays the same, even as your benefit amount goes down because you’re paying off your mortgage. You don’t get a lower rate even though the insurance company assumes a lower risk every month you make a mortgage payment.
Is It Worth Getting Mortgage Protection Insurance?
If you’re covered by life insurance and disability insurance and you have a solid emergency fund, mortgage protection insurance isn’t necessary. You should be able to cover mortgage payments in case of your death or disability and avoid the added monthly premiums more insurance requires.
But MPI can increase your payouts and guarantee you have enough to cover your mortgage and avoid losing your home in case of the unexpected. That frees up your basic life or disability benefit, or your emergency fund, to cover other expenses.
Mortgage protection insurance could also be worthwhile if you can’t qualify for basic life insurance. It doesn’t offer the kind of broad financial support your beneficiaries would get from life insurance, but it at least keeps them from being saddled with a large mortgage.
Should You Buy Mortgage Protection or Term Life Insurance?
In most cases, you may want both life insurance and mortgage protection insurance or just life insurance — but probably not just mortgage protection insurance. But exceptions always exist, so consider your circumstances and your family’s financial needs.
Why Buy Term Life Insurance?
- Low Premium. Life insurance tends to come with lower monthly premiums than mortgage protection, and buying term life at a young age could help you lock in a low rate.
- Fixed Benefit. Life insurance pays out a set amount whenever you die, not tied to how beneficiaries will use the money.
- Unlimited Use. Beneficiaries can use a life insurance death benefit however they choose, with no restrictions, including to pay off a mortgage or cover monthly payments.
Why Buy Mortgage Protection Insurance?
- Guaranteed Mortgage Coverage. MPI pays off your mortgage in case you die, so your family doesn’t become responsible for repayment. It also pays directly to the lender, which simplifies the process, so your family doesn’t have to worry about contacting your lender and squaring away the debt.
- Easier to Qualify. MPI doesn’t typically require a medical exam, and acceptance rates are much higher than those for life insurance. Mortgage protection might be your best option if you can’t qualify for basic life insurance.
- Increased Coverage. If you buy both MPI and term life insurance, your beneficiaries won’t have to worry about covering the mortgage with the life insurance payout and can use the funds for other needs.
- Disability Protection. MPI also generally covers some or all of your monthly mortgage payments in case you’re injured or disabiled, which life insurance does not cover.
Mortgage payment protection is one of many types of insurance you might need. Whether it makes sense for your family depends on your circumstances and financial situation.
MPI is somewhat superfluous coverage if you already have a life insurance policy. Beneficiaries can use your life insurance benefit to cover mortgage payments and any other costs after you die. Purchasing MPI along with a term life policy would mean paying an extra monthly premium in exchange for a greater payout.
You could probably save money on life insurance by increasing your term life coverage and premium, rather than purchasing MPI for an even greater monthly premium.
But if you can’t qualify for basic life insurance, purchasing mortgage protection could be a wise move to protect your family from inheriting a massive debt in case you die.