By Dr. James M. Dahle, WCI Founder
Companies are always looking for ways to sell you more insurance, especially life insurance. Mortgage protection insurance (sometimes called mortgage life insurance) generally falls into this category.
What Is Mortgage Protection Insurance?
Mortgage protection insurance is simply a life insurance policy where the payout is tied to the size of your mortgage. The idea is that if you die, your mortgage gets paid off and your family can then live in the house without having to worry about making the mortgage payment. Yes, they'll still have to pay the property taxes and insurance.
The product is often sold by banks and lenders rather than life insurance companies. The beneficiary of the policy is actually the lender, not your heirs. You generally have to buy it within 24 months of getting a mortgage, but some companies may allow you to do it for up to five years. That time period may be extended after a refinancing. You also likely need to be under 45 years old to qualify.
The payout also gets smaller over time as the mortgage shrinks. But don't expect the premiums to get any smaller.
Is That Private Mortgage Insurance? MPI vs PMI.
No. It's really important that you understand the difference. Private Mortgage Insurance (PMI) is simply the insurance that a lender might require you to purchase to protect the lender from you defaulting on your mortgage. It does nothing for you or your heirs. You can generally avoid it by either putting 20% down on the house purchase or by using a doctor mortgage.
Does Mortgage Protection Insurance Only Cover Death?
Some policies also have provisions or riders that provide some limited protection if you lose your job or become disabled. In those cases, the policy generally makes your mortgage payments for a limited period of time rather than paying off the mortgage completely.
Is It Just a Gimmick?
Many view mortgage protection insurance as a product designed to be sold, not bought. If you are young and healthy, you can likely obtain much more life insurance coverage at a better price via a standard term life insurance policy. Then, your heirs can use it for whatever they want and not just to pay off the mortgage. Most white coat investors are going to need far more term life coverage than the size of their mortgage anyway.
Should Anyone Buy It?
I get occasional emails from people who either cannot purchase life or disability insurance or who are charged an exorbitant amount for it due to their dangerous hobbies or medical history. Their options for coverage are often limited to employer-provided group plans or perhaps a professional society group plan, and for disability, maybe a Guaranteed Standard Issue (GSI) policy available through a large employer or academic hospital.
However, the one advantage mortgage protection insurance provides is that there is no underwriting. While any given company may differ, the typical requirements are simply to have a mortgage and to be younger than 45. The larger your mortgage, the more of your term life insurance needs that can be covered with mortgage protection insurance rather than typical but unavailable term life insurance. With a disability rider, the policy can also function as a partial disability policy. Naturally, you'll want to read the fine print. The definition of disability probably isn't going to be as strong as in a good own occupation policy. So if you're a scuba diver and a base jumper with diabetes and active cancer, this type of insurance may be a surprisingly affordable option to provide some life and disability coverage.
Who Sells Mortgage Protection Insurance?
The first place to inquire is with your lender. If they don't offer it, they may have a relationship with a company that does. You can also contact an insurance broker or a private insurance company that specializes in this product. Finally, you might try a more typical life insurance agent for assistance as some life insurance companies do offer this product.
What do you think? Do you have mortgage protection insurance? Why or why not? Would you consider it if you didn't qualify for term life or disability coverage? Comment below!