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Do You Really Need Mortgage Protection Insurance?

March 31, 2010

Mortgage protection insurance coverage varies depending upon the company making the offer. But most provide protection for life-changing situations like temporary or permanent disability, job loss, or death of the insured.

Is There Any Value To Mortgage Protection Insurance? Let's Find Out

In order to determine whether or not you'll benefit financially from home mortgage protection, you need to examine your personal situation. Here are the key areas to focus on:

• How is your health? Are you eligible for standard or term life insurance without being rated for any pre-existing health conditions or lifestyle risks such as skydiving, scuba diving, or race car driving?
• Do you carry an adequate amount of life insurance to pay off your mortgage and still provide for your family's living and educational needs for an acceptable period of time?
• As close as you can estimate, what's your employment outlook? Are you in a "safe" position that's unlikely to be impacted by the economic conditions? Or is your job at risk?
• There is no way to pre-determine whether or not you are at risk for an accident that could result in disability. But you can take a look at your job and lifestyle risks to see if you have a greater than normal chance.

If you are adequately insured, in good health, relatively secure in your job, and have no unusual lifestyle risks, you may not need to buy this type of coverage. Here's why:

Understanding Mortgage Protection Insurance

Mortgage protection insurance, usually referred to as MPI, and also known as mortgage payment protection insurance (MPPI), is nothing more than a single or multi-risk insurance policy that pays a defined amount in the event a covered risk occurs.

MPI is not to be confused with Private Mortgage Insurance (PMI), which some lenders will require if you have less than a 20% down payment for a new mortgage or less than 20% equity if you're looking to refinance.

PMI only guarantees payment to the lender in the event the home is lost due to foreclosure. It doesn't protect the borrower against a loss in the ability to make regular mortgage payments.

MPI payments on the other hand, are designed to cover the monthly mortgage payment for some defined period of time. However, any benefits paid go directly to the mortgage company and not to the borrower.

Mortgage Protection Insurance Benefits

The biggest benefit of MPI is that it is a "guaranteed acceptance" policy. This means you cannot be turned down for any reason including pre-existing health conditions and work or lifestyle or risks. Borrowers who are in either of those categories might see MPI as the only affordable way to stay in their home in the event a life-changing situation occurs.

Of course, for those who carry existing life and disability coverage, there is also the benefit of being able to reallocate that insurance protection to providing for the family in the event of death or serious disability.

Mortgage Protection Insurance Drawbacks

First and foremost, it stands to reason you don't need MPI if you aren't carrying a mortgage. Beyond that, it's important to understand that MPI provides "declining protection" coverage. This means as the mortgage balance decreases, so does the maximum payout benefit. But the premiums remain the same.

There are also tax considerations in the event of the death of the mortgage holder. Depending upon the surviving spouse's tax situation, it may be more financially prudent to keep the mortgage and invest the proceeds of the other spouse's life insurance rather than paying the mortgage off in one lump sum.
Some financial experts take a negative view on the need for MPI. According to Walter Updegrave, CNN/Money contributing columnist, "It rarely makes sense to buy insurance for narrow reasons -- to insure against a specific disease or a single calamity or to provide funds to pay off a single liability, in this case your mortgage." He recommends instead that the borrower invest in life insurance in an amount sufficient to pay off the mortgage and provide for the family's ongoing financial needs.

Of course, that strategy does not provide protection against job loss or disability. But other broader coverage policies are available for short- and long-term disability protection, so it's wise to examine those options as well.

Tips for Choosing MPI

Someone forced into taking MPI because other insurance options are not available should look for multiple quotations from a variety of insurers rather than simply accepting the coverage provided by the lender.

Be sure to get coverage limits and covered events in writing, before signing, and compare each policy offer on an apples-to-apples basis. If the only goal is to provide a method of paying off the mortgage in the event of death, a level-payment term life insurance policy may be the best bet if the borrower qualifies.
Planning for mortgage protection makes good financial sense. The only issue is to make sure the coverage matches the need and anticipated risks and that the premium makes sense when compared to other mortgage protection insurance options.

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