Mortgage protection insurance is a type of policy that offers financial protection in the event that you are unable to make mortgage payments due to illness, injury, or death. This can be a valuable asset for homeowners, and it’s important to understand how mortgage protection insurance works before you decide whether or not it’s the right choice for you. This article will discuss the basics of mortgage protection insurance and how it can help protect your home and family.
What Is Mortgage Protection Insurance?
Mortgage protection is a low-cost form of term or whole life insurance that is tailored to homeowners. A mortgage protection policy generally lasts for the same number of years as your mortgage – or “term.” The quantity of mortgage life insurance coverage you’ll require depends on your income, dependents, and spouse’s life insurance coverage (if they have any).
Most people opt for a coverage term that’s close to the number of years they expect to make their mortgage payments. You will pay a monthly or yearly premium once the insurer has approved your insurance application. Your policy stays in force as long as your premiums are paid on time. If you die during this period, the insurance company will pay the remainder of the outstanding mortgage so that your family can stay living in the home.
A mortgage protection policy is one of the most cost-effective forms of insurance available. Your premium is determined by the amount of coverage you require (the size of your mortgage), as well as your age, health status, and tobacco usage. Many insurance providers provide simplified underwriting, which means you won’t need to undergo a medical exam to qualify (normally under $250,000 dollar amount).
The absence of medical underwriting makes these policies a great fit for those with pre-existing health conditions or who do not qualify for other life or disability insurance.
How Does Mortgage Protection Insurance Work?
Mortgage protection insurance in Texas (also known as mortgage protection life insurance and mortgage life insurance) is a policy that reimburses the remaining balance of your mortgage should you pass away.
Up until the housing crash of 2008 and 2009, the lender was the beneficiary of a mortgage protection policy. If the policyholder died, the bank was paid the remaining mortgage.
However, the housing crash uncovered practices that were taking place unknown to home buyers. When issuing a mortgage, some lenders were adding the mortgage protection insurances without discussing it with the home buyer. Other clients were getting denied one of these policies for insubstantial reasons.
When these practices were found out, regulations were put in place. Now, banks are not allowed to add mortgage protection insurance to a mortgage, nor are they allowed to sell it to consumers.
Homeowners can purchase mortgage protection insurance from a licensed insurance agent. They can choose their own beneficiary and can also add on a co-insured for an additional premium.
Mortgage Protection Insurance Riders
There are two options that might be available to add to your mortgage protection insurance.
A living benefits rider offers the ability for you to access the benefit if the policyholder is diagnosed with a terminal illness that is likely to result in death within the next 12 months.
A return of premium rider will return the full amount of the premiums if the policyholder lives past the policy’s term. This is a great benefit but does come with a much higher monthly premium. Your policy will have specific rules and timelines you should understan3d before adding this rider.
Some people use the return of premium rider as a way to save for college expenses or childcare. When they get the lump-sum payment upon the policy’s expiration, they can use it to pay for expenses they have been expecting for years. This is a great way to protect yourself in the now and also save for the future.
Mortgage Protection Insurance versus Other Life Insurance Policies
MPI policies work similarly to conventional life insurance. You pay a monthly premium to the insurer, and in return, the policy protects you. If you pass away during your policy term, the insurance provider pays out a death benefit.
The terms of your policy, as well as the number of monthly installments it will cover, are defined by the policy’s terms. Many insurance policies promise to pay the rest of your mortgage term, but this can vary depending on the insurer.
Some mortgage protection policies have guaranteed acceptance but they usually cost more and have lower benefit amounts. Other life insurance policies do not typically have this benefit. They’ll require medical underwriting and often a physical exam before accepting your application. Plus, they will increase your premiums if they find you are a higher risk than the average policyholder.
However, since MPI policies don’t usually require medical underwriting, they usually have higher premiums. The insurance company must plan for more payouts since they have not screened their members.
Mortgage Protection Insurance versus Private Mortgage Insurance
They might sound the same, but an MPI and a PMI are not the same things. Private mortgage insurance safeguards the lenders if you stop paying your mortgage. However, it will not continue paying your mortgage if you die. PMIs do not provide any kind of protection to the homeowner.
Many lenders require home buyers to purchase PMI if they have a down payment of less than 20% of the purchase price. Once your equity reaches 20%, you can cancel a PMI policy.
Mortgage Protection Insurance versus Federal Housing Administration Mortgage Insurance
If you get an FHA loan, you are required to have a mortgage insurance premium (MIP). You will pay an upfront premium as well as annual payments to your FHA MIP. The amount you pay depends on the amount of your loan. Most of the time, lenders add this amount to your monthly mortgage payments.
However, like the PMI plans, these protect the lender, not the homeowner.
How Much Does Mortgage Protection Insurance Cost?
The cost of mortgage protection insurance varies based on a variety of factors. The outstanding balance of your mortgage loan and the amount of time left on your term will be evaluated by insurance providers. They’ll also consider your age, occupation, and overall risk profile, just as they would with a regular life insurance plan.
When you apply for MPI, the insurance company will submit a Medical Background Check (MIB). This process is quick and the company will be able to quickly determine if your application was approved. At this point, they’ll be able to see your medical history and begin calculating your rate.
There are some policies that offer premiums for just $10 per month.
Is Mortgage Protection Insurance Worth It?
Only you can decide if mortgage protection insurance is worthwhile since it’s largely dependent on the needs of each individual. There are a few instances in which MPI would be most beneficial:
● If you have underlying health conditions that might affect your long-term well-being
● If you have a job that is high-risk or hazardous
● If you have trouble getting approved for a life insurance policy
However, if you think your family would benefit more by being able to use the money for other expenses – other debts, bills, taxes, burial expenses – a traditional life insurance plan might make more sense.
Mortgage protection insurance is an important consideration for those who have a home and are worried about the financial consequences of major health issues. We offer consultations to assess your needs and find the best policy for those seeking peace of mind. Call our office today and schedule an appointment to discuss what kinds of mortgage protection insurance would be helpful to you and your family.