Most people experience incredible excitement when they purchase a new home, especially first-time homebuyers. They’ve probably saved considerable money for the down payment and closing costs and usually let out a big sigh of relief when the closing is completed.
Purchasing a home is a big deal and the process includes many hurdles that have to be addressed along the way. Think about it for a minute. Even if you have purchased several homes in your lifetime, you still have to locate that perfect home, make an offer and negotiate a purchase price, jump through the insurance hoops, order and wait for the buyer’s inspection, and then show up at the closing with a certified check. It’s a big deal!
Once you’ve closed and finally have the opportunity to take a breath, the insurance offers will start piling up in the mailbox. Not homeowner’s insurance, because you’ve already purchased that, the offers will be for Mortgage Protection Insurance.
What is Mortgage Protection Insurance?
First of all, let’s be clear from the beginning; mortgage protection insurance (MPI) and private mortgage insurance (PMI) are not the same things. Typically, buyers who pay less than 20% down on the home loan are required to purchase private mortgage insurance to protect the lender’s interest but mortgage protection insurance protects you and your family and is not required.
Mortgage Protection Insurance is a life insurance policy (usually term insurance) that is purchased so that the mortgage can be paid off after the death of the insured. Mortgage Protection insurance is actually a purpose for insurance and not the type of insurance. In fact, the terms “Mortgage Protection Insurance” will not be found on the policy contract. It is a purpose for the insurance policy.
Typically the insured is taken out on the primary income earner in the family but nowadays many families have dual primary income earners so a married couple may need to have two policies, especially if both incomes are needed to meet the mortgage payment.
How Does Mortgage Protection Insurance Work?
For this example, let’s say that Sam and Laura Jones have recently purchased a new home and have a $300,000 30-year mortgage. Sam is the breadwinner in the family because Laura is a stay-at-home Mom with two very young children.
Here is the risk. If Sam were to die unexpectedly without Mortgage Protection insurance, would there be enough life insurance that he has purchased or is provided through his employer to pay off the mortgage so the family can remain in the home? In many cases, the answer is no.
So, without sufficient life insurance to pay off the mortgage, Laura will have to get a job to continue making the house payments or put the house up for sale. There is a substantial financial risk to the surviving loved ones whenever a primary breadwinner dies without sufficient life insurance to help the surviving spouse or partner continue on financially. Having Mortgage Protection insurance mitigates (eliminates) that risk.
How Much Does it Cost?
The good news is that since Term Life insurance is used to build your Mortgage Protection Insurance policy, the cost of the policy is usually very affordable. As with any life insurance policy, your rates will be based on your age, your health, and the amount of coverage you need. There are also certain insurance riders that you may want to add to your policy – we’ll talk about that in a minute.
Using Sam and Laura as an example, here is what they would be looking at for a $300,000 30-year term policy if Sam is 30-years old and a healthy non-smoker:
As you can see, the monthly premium for Sam’s Mortgage Protection insurance is less than $30 per month and that rate remains the same for 30 years. And since this is a level term policy, if Sam were to die in the 28th year and the mortgage balance is very low, Laura would pay off the mortgage and then put the rest of the death benefit in her pocket; and the money is tax-free. The mortgage can be paid off if Sam dies a one month or 359 months after the policy is issued!
Is Mortgage Protection Worth It?
Absolutely it is worth it. For less than the cost of two large pizzas, Sam is able to provide a paid for home to his surviving loved ones if he were to die unexpectedly. Imagine the peace of mind you would have knowing that your family will be able to stay in the family home when you’re not there to make the payments.
Are There Riders Available?
Great question! Yes, there are several optional riders you should consider when you are considering Mortgage Protection insurance.
Disability Waiver of Premium
The disability waiver of premium rider provides for the insurer to waive the periodic premiums if the policyholder is totally disabled and cannot work.
Disability Income Rider
This important rider broadens the coverage of your Mortgage Protection insurance by providing a monthly payment to the insured if they become disabled and unable to work.
Return of Premium Rider
The return of premium rider converts your Mortgage Protection insurance from an expense into an asset. If, at the end of the policy term the policyholder is still alive, the insurance company will return to the policyholder all premiums paid during the term of the policy in one lump sum that is tax-free.
What the Naysayers are Saying about Mortgage Protection Insurance
“With mortgage protection insurance, the lender is the beneficiary”
Actually, that’s not true. As the policyholder, you can name anyone you wish to be the beneficiary.
“The rates for mortgage protection insurance are higher than regular insurance rates”
That’s not true either. Your Mortgage Protection insurance rates are the same as regular insurance rates for the term you’ve selected.
“Mortgage Protection insurance is a decreasing benefit”
That may have been true 25 years ago. Today’s Mortgage Protection insurance policies pay a level benefit for the term of the policy.