Buying a home is one of the biggest decisions you can make in your lifetime. But have you ever wondered what would happen to your home if you passed away or became totally disabled before paying off your mortgage in full?
Will your loved ones have a roof over their heads? Will they be able to keep up with the mortgage repayments without your income?
In light of these uncertainties, it’s important to plan ahead. One of the ways you can go about this worst-case scenario is to take out mortgage protection insurance.
But is mortgage protection insurance a good bargain or a bad one? Let’s find out.
What is Mortgage Protection Insurance?
Mortgage protection insurance, or MPI, is a form of life insurance policy that pays off your outstanding mortgage if you were to pass away or become seriously incapacitated and unable to work before the loan is paid in full. It’s specially designed to protect your family from the risk of the lender reselling your home in the event of your untimely death or disability.
MPI is often confused with private mortgage insurance (PMI). With PMI, the lender is protected if you default on your loan, meaning that your family would still need to pay the loan balance after you’re gone.
How Does Mortgage Protection Insurance Work?
When you sign up for mortgage protection insurance, you’re given a price based on your age, income and other factors. You’ll be required to pay monthly premiums for as long as the policy is in effect. The policy’s premiums typically stay the same throughout the term, but the policy’s value goes down over time.
The terms and conditions may vary depending on which mortgage protection policy you choose. But generally, your mortgage lender is designated as the policy’s beneficiary, not your spouse or your heirs.
This means when you pass away or become disabled whilst the policy is still active, the insurer will pay your lender a lump sum equivalent to the amount you still owe on your mortgage loan.
Why Mortgage Protection Insurance is a Good Idea
Some of the benefits of purchasing a mortgage protection insurance policy include:
The policy can offset your outstanding mortgage balance
You’re not legally obliged to get mortgage protection insurance when taking out a home loan. However, purchasing this type of coverage makes sense if your heirs will want to continue staying in your home after you pass away.
The policy also gives you peace of mind knowing that your surviving family members will have a place to call home after you’re gone.
Guaranteed approval
With most life insurance policies, your eligibility depends on your health status. Mortgage life insurance generally doesn’t involve a medical exam and there is guaranteed approval even if you’re in poor health. This can be beneficial for people who have underlying health conditions and are struggling to secure a policy.
Disability protection
If you were to become too disabled and unable to work, would you be able to make your monthly mortgage payments with your emergency savings and still provide for your family’s day-to-day expenses? If you answered no, then a mortgage insurance policy may be a good idea.
Some MPI policies usually will make mortgage repayments—for a limited period—if you become disabled and find yourself out of work.
Why Mortgage Protection Could be a Bad Idea
Whilst mortgage protection insurance is useful, this policy type has a few key downsides, including:
Lack of flexibility
With mortgage protection insurance, you don’t get to decide who receives the policy proceeds after you pass away. The policy’s beneficiary is the mortgage lender and no one else can use the death benefit for any other reason.
Decreasing coverage
The mortgage protection insurance payout is usually matched to your mortgage balance. That means as your outstanding mortgage balance decreases, so does the policy’s payout. Yet your premiums don’t change over the course of your policy term.
Age restrictions
Some mortgage protection insurance policies have more age restrictions than a term life insurance policy. For example, some insurance companies won’t offer a 30-year MPI policy to applicants aged above 45 years.
Frequently Asked Questions
Must you take out life insurance to get a mortgage?
A common question we get asked is, do you have to have life insurance with a mortgage? No, it’s not a legal requirement to secure life insurance when getting a mortgage. However, it’s recommended that you purchase a policy. This is because some lenders consider it a precondition before letting you borrow money to purchase a home.
How much does mortgage protection insurance cost?
The amount you’ll pay for an MPI policy depends on a variety of factors. These include your age, the amount of coverage you need, the current outstanding balance on your mortgage, and the number of years left on your mortgage.
Can I get mortgage protection insurance with my spouse?
A single mortgage protection insurance policy can provide coverage for up to two co-borrowers. If both borrowers die at the same time, the outstanding mortgage balance is paid off by the policy. If one borrower dies, the policy continues on the surviving person.
Bottom Line: Is Mortgage Protection Insurance a Good Idea?
Whether mortgage protection insurance is a good idea or not largely depends on your specific needs. If you’re in good health and eligible for traditional life insurance, then mortgage protection insurance might not offer the best value for your money.
In that case, a traditional life policy is more likely to give you much better value as it provides coverage beyond mortgage—like taxes, bills, funeral costs, etc.
However, if you have trouble getting approved for traditional life insurance due to underlying health conditions, or if you’re employed in a high-risk profession, an MPI policy would make sense.
Overall, mortgage protection insurance is a great way to ensure your loved ones don’t sleep out in the cold if you were to pass away or become too disabled to work.
