Successfully dealing with a crisis is usually not about the decisions you make in the heat of the moment, but rather the precautions you took while things were running smoothly. Getting mortgage protection insurance is one of the best examples of this principle.
It may seem absurd and unfair, but a mortgage you’ve been faithfully paying off for a decade is just as much in arrears, after a few missed payments, as one that’s only a couple of months old. In either case, the bank has the option of foreclosing. If they choose to do so, you’re almost certain to take a major financial hit and have your whole long-term plan turned on its head.
The problem is (and bank managers understand this) that few people choose to default on their mortgage. When it happens, it’s almost always due to circumstances beyond their control: the loss of a job, payments on a variable-rate mortgage suddenly becoming unaffordable, major medical expenses. The bank’s employees will probably be sympathetic in this case, but they actually have a very little leeway when it comes to deviating from policies set at a corporate level.
No matter how friendly the bank seems when they’re trying to sell you a mortgage, only dollars and cents will matter to them if things go south. This is why you need some extra safeguards. Is mortgage protection insurance worth it? Unless you can predict the future and see nothing but smooth sailing in the coming years, the answer is often yes.
Table of Contents
- 1 What Is Mortgage Protection Insurance?
- 2 How Does Mortgage Insurance Work?
- 3 What Are the Pros of Mortgage Protection Insurance?
- 4 What Are the Cons of Mortgage Protection Insurance?
- 5 The Difference Between MPI and PMI
- 6 Alternatives to Mortgage Protection Insurance
- 7 Should I Get Mortgage Insurance Protection?
- 8 Final Thoughts
What Is Mortgage Protection Insurance?
Ironically, many insurance policies don’t really benefit you directly: life insurance is there to take care of your dependents if something should happen to you, while the main purpose of car insurance is to protect you from liability in case of an accident. This doesn’t mean that insurance is optional: in both cases, the consequences of being caught without a policy far outweigh the inconvenience of paying a monthly premium.
When it comes to mortgage protection insurance, the beneficiary is the bank. If you should find yourself unable to keep up with payments due to any of a specified set of circumstances – prolonged unemployment, disability, etc. – the insurer takes over the burden of servicing your mortgage. Banks like to work with homeowners with insurance since it reduces the risk of default. Homeowners benefit too: instead of potentially losing many thousands of dollars in equity through no fault of their own, they can rest easy. Even if a breadwinner should die, his or her family doesn’t need to lose their home: mortgage protection, life insurance, and disability policies can even be bundled into the same package.
How Does Mortgage Insurance Work?
Each month, the homeowner pays a sum of money to the insurance company. It’s not really meant to give an average cost of mortgage protection insurance since the premium amount depends on issues like:
- The market value of the property;
- The outstanding mortgage amount;
- The age and health of the homeowner;
- The likelihood of them becoming disabled in their profession;
- As well as any other factors affecting the risk that someone will at some point be unable to cover their mortgage payments.
All these contributions are pooled at the insurance company. If calamity strikes one of their clients, they pay out according to the terms of that specific policy. If you have mortgage insurance in case of death, for instance, they may take over the mortgage and pay it off completely if you die unexpectedly. With regards to temporary unemployment or disability, the contract may state that the policy only kicks in after a few months and then provides coverage for a specified period of time, usually a year or two. All of these particulars can be tweaked to suit you; see this example from State Farm to get an idea of how it works.
What Are the Pros of Mortgage Protection Insurance?
It can be difficult to assess the worth of any insurance policy. Is life insurance worth it? Probably yes, but only if something horrible happens to you. In the same way, MPI’s advantages only shine through when something bad occurs, but at that point, you’ll be enormously thankful to have it.
- If you have both mortgage protection and homeowner’s insurance, you’re pretty secure financially, even if you’re living hand to mouth. The whole point of insurance is, after all, to keep an unfortunate event from becoming a catastrophe.
- Since MPI is relatively cheap and easy to get even at the best mortgage protection insurance companies, it can make a convenient substitute for life and disability insurance. For most people, what they owe on their house makes up the major part of their debt burden. Of course, this kind of policy won’t help with things like future living expenses and college tuition for your kids, meaning that your family might have to resort to online personal loans even though house payments are covered.
- The term lengths for these policies are highly flexible. You may, for instance, choose between a 10-year policy that expires when you own 60% of your house or a 15-year option that ends when you own 85%. How long you pay mortgage insurance affects how much you’ll get out of it if it comes into effect, even though premiums usually stay roughly the same over the life of the policy.
What Are the Cons of Mortgage Protection Insurance?
The major downside to MPI is, of course, that it costs money. Every month, you’ll have a little less to spend on shiny stuff that catches your eye. Aside from this, there are a couple of drawbacks you need to be aware of:
- Many people have toyed with the idea of getting a “second mortgage”, often even before the first is paid off. Despite the name, however, home equity loans and HELOCs (Home Equity Line of Credit) aren’t at all like proper mortgages and their payments aren’t covered by MPI.
- MPI policies are settled directly between the lender and the insurer. Even if you have more urgent needs, like hospital bills, the funds won’t be accessible to you. There’s no way a company like Liberty is going to write a check to you instead of the mortgage holder.
- In contrast to something like life insurance, it can be really difficult to find mortgage protection insurance services reviews that actually allow you to compare apples with apples and bananas with bananas. Getting the right MPI, therefore, requires a lot of legwork, or at least mouse-clicking, to determine which companies are legit and which, perhaps due to an indifferent approach to customer service, are essentially scams.
The Difference Between MPI and PMI
These two abbreviations seem almost designed to confuse dyslexics and can easily be mistaken for one another. In reality, though, they are by definition polar opposites.
The whole idea behind MPI (Mortgage Protection Insurance) is for the homeowner to avoid foreclosure or financial hardship in case something unlikely happens; we’ve pretty much covered the subject above. PMI (Private Mortgage Insurance) is a completely different beast.
Banks are always on the hunt for new customers, even if these don’t meet the traditional criteria for things like home loans. At the same time, they’re eager to cut their losses in case a bad credit risk doesn’t work out. This is where PMI comes in: someone wishing to buy a home without a down payment of at least 20% can still qualify for a mortgage as long as they pay extra to insure the bank’s stake in the property. If they default, the house will still be foreclosed. While PMI does make homeownership more accessible to people in certain situations, it provides no other benefit to them while still costing them money. PMI is automatically terminated once the mortgage is paid off to where it would have been if the usual down payment had been made.
Alternatives to Mortgage Protection Insurance
There’s almost always more than one way to accomplish a task. Before you start gathering quotes, it’s a good idea to take a minute to think about other approaches you can take. Remember that MPI is a long-term proposition; while you might take out a payday loan almost on a whim, mortgage insurance deserves careful consideration.
- An individual’s personal risk profile doesn’t affect how much mortgage protection insurance costs to the same extent as with life insurance policies. If you’re under 40 and in good health, don’t smoke and work in an office instead of a coal mine, there’s a good chance that comprehensive life and disability cover will actually work out cheaper.
- If you’re already insured against death and disability, what does mortgage insurance cover that you don’t already have? Putting the money that would’ve gone into premiums into an easily liquidated investment instead guards against a sudden loss of income and will add to your nest egg if you don’t suffer an emergency.
Should I Get Mortgage Insurance Protection?
It’s extremely rare for any question like this to have a one-size-fits-all answer, which is why talking to a personal finance guidance agency every couple of years or before any major decision is such a good idea. One-liners really can’t replace this kind of advice, but the following may be useful as a general guide to get your thinking started:
Yes: If there is a fair to a good chance of you losing your job in the coming years, MPI is a great idea. Your industry may be volatile or your company on borrowed time; in either case, you’ll be glad to have a financial cushion when the hammer falls.
All MPI policies include an exclusion period clause during which you pay premiums but aren’t covered, especially for unemployment. This is to prevent people from getting mortgage protection insurance only once they think they might be laid off.
No: If you have sources of passive income, losing your salary might not even be that big of a deal. You’ll probably have to cut back on some luxuries for a while, but your ability to service your mortgage won’t be placed in jeopardy.
Yes: If your mortgage still has two decades to run, there’s plenty of time for things to go wrong. Having MPI in place, therefore, makes a lot of sense.
No: If your house is nearly paid for, it will probably be easy to find another source of credit to settle the remainder even if you get strapped for cash. With most policies, the monthly premium remains the same even as the potential payoff declines.
Yes: If you’re self-employed. Enough said.
Yes: If you have pre-existing health issues that mean you can’t get affordable life insurance – at least your family won’t have to worry about losing the house.
Mortgage protection insurance is a simple concept in theory, but in practice, different companies offer very different packages. Shop around and compare different offers rather than filling out the first MIP form that lands in your mailbox! Your personal financial planning should never be based on marketing hype; considering how long you pay mortgage insurance for, spending half an hour researching your options is the least you can do.
Thank you for reading!