Pros and cons of mortgage life insurance
Mortgage life insurance is a term policy where beneficiary of the policy is the mortgage lender. In the event of your death, it pays off your mortgage debt.
A sense of pride comes with owning your own home; after all, one's home is their castle, or so the proverb goes. Naturally, you want to take care of it and protect it, so you keep up with regular maintenance and have a homeowners insurance policy.
But that might not be enough, says USAA advice manager Matt Lyon.
According to him, you've probably received advertisements about mortgage life insurance. “It shouldn't be your first consideration for life insurance,” he says. “But for some mortgage holders, it can make sense.” Read on to learn more.
What is mortgage life insurance?
Mortgage life insurance, also called mortgage protection insurance (MPI) or mortgage protection life insurance, is a type of credit life insurance that covers your mortgage if you die before paying off your home loan.
Mortgage protection life insurance protects your mortgage lender and can offer peace of mind. You'll know that your loved ones won't inherit a large debt — your mortgage — if you pass away unexpectedly.
A lot of people confuse mortgage protection life insurance with private mortgage insurance (PMI), says Lyon. “But they're very different,” he explains. “PMI is meant to cover your loan in the case of payment default.” Typically, PMI is required for down payments of less than 20%, whereas mortgage protection insurance is not a requirement.
How does mortgage life insurance work?
Mortgage protection life insurance covers the balance of your mortgage obligation. In most cases, there are no requirements to qualify for mortgage life insurance. It usually goes into effect as soon as it's issued, unlike other types of life insurance that might require a waiting period. The face amount, or death benefit of the policy, is equal to your mortgage balance. The payments go to the issuer, who is usually your mortgage lender.
The beneficiary of mortgage life insurance is the lienholder. So, if you were to die, the insurance pays off what's still owed on your mortgage — instead of that debt falling to your loved ones.
While that may sound like a good thing, mortgage life insurance is a niche product that's not for everyone. It's important to weigh the pros and cons when considering mortgage life insurance.
Pros of mortgage life insurance
For many people, a mortgage is their biggest expense, and their home is their biggest asset. “When we talk to people who are shopping for life insurance, many say covering their mortgage is one of their top priorities,” says Lyon.
If you're in the market for life insurance and have a history of major health concerns, you may be able to find MPI rates that are comparable with what private life insurance companies may offer.
“This is especially applicable if you've applied for life insurance before, and you don't expect to be approved,” says Lyon.
MPI may also offer some common life insurance riders and benefits. These can include return-of-premium riders and living benefit riders. Be sure to pay attention to the fine print, as there are often stipulations and extra costs for adding them. Keep in mind these riders are also available on some standard term life policies.
Veterans' Mortgage Life Insurance
As you weight the pros and cons of MPI, keep in mind that the Department of Veterans Affairs offers something called Veterans' Mortgage Life Insurance (VMLI). This coverage is usually available at an amount equal to your mortgage balance, at a maximum amount of $200,000. Like other forms of MPI, the beneficiary is the lienholder of your mortgage. And like MPI, VMLI will pay off your mortgage if you die unexpectedly so your family doesn't lose the home.
With VMLI, the policyholder makes premium payments directly to the VA, not their mortgage lender. This coverage usually comes at a fair rate along with specific qualification requirements for both servicemembers and veterans.
Cons of mortgage life insurance
When it comes to MPI, the cons often outweigh the benefits. “That's because most general life insurance offers the flexibility to meet a variety of needs for the beneficiary,” says Lyon. “For example, instead of being limited to paying off mortgage debt like MPI, the death benefit paid by a general life insurance policy can be used to replace income, pay off other loans, cover funeral costs, help pay living expenses or go toward any other financial need.”
Because MPI coverage can decrease as you make mortgage payments and pay down your mortgage balance, it might not be worth your investment. For example, with an annual renewable or level term policy, your coverage amount stays level. This means that as you pay down your mortgage, the benefit can be utilized for other financial goals.
Finally, MPI is more expensive due to its lack of underwriting. A healthy individual can usually find more favorable premiums with a standard term life insurance policy. Over time those policies might be better use of money because the payout won't decrease.
Is mortgage life insurance worth it?
It depends on your situation, says Lyon. “If you don't think you can qualify for a traditional life insurance policy, MPI might be a good fit. But it's important to keep the lack of flexibility in mind. Because the death benefit goes directly to your lender, it's the only financial help your loved ones will receive.”
You'll also need to consider whether the high premiums that usually accompany MPI work with your budget. MPI premiums can fluctuate. They're typically only fixed for a certain period and can increase after that.
It's responsible to think about how your family will cover mortgage payments if you die unexpectedly, advises Lyon. “But weigh all your life insurance options to make sure you're making the best decision to provide for your loved ones after you're gone.”