Protect your mortgage with the right insurance

Many homeowners are concerned about the repayment of their mortgages in the event they lose their jobs, become disabled because of an accident or illness, or when they die. Their fear is valid because a number of families have experienced losing their homes because of death or disability on the part of the main breadwinner.

This is where mortgage protection insurance policies come into play. Chances are you have been offered this kind of protection if you have a mortgage on your home.

Mortgage protection insurance and how it works

This type of insurance is also referred to as mortgage payment protection insurance. In simple terms, it is a policy that pays off the a home loan in the event the one insured dies, loses their job or gets disabled.

This type of policy should not be confused with private mortgage insurance, which provides coverage to the mortgage lender in case of a default on the loan. MPI is an optional purchase while PMI is required by lenders when the down payment on a home purchase is less than twenty percent.

For MPI policies that are designed to pay off the home loan upon death of the policyholder, the insurer will make payments directly to the lender leaving the survivors a house that is free from encumbrances.

For job loss or disability MPI policies, mortgage payments done by the insurer are only for a certain time period usually one to three years. There could also be a waiting period before the insurer actually makes the payments.

The cost of an MPI policy will depend on certain factors including: the chances of the policyholder losing his job, the amounts paid toward the mortgage, as well as the state of the economy.

Benefits and drawbacks

One advantage of MPI policies is that there is less hassle involved when filling out applications (even those with medical pre-conditions or deemed uninsurable are accepted). The same benefit is afforded to individuals whose high-risk jobs prevent them from getting disability insurance.

The disadvantages include:

  • Decreasing benefit - as the mortgage is paid down during its term, the value of the MPI policy also decreases. For example, you have a thirty-year loan and you happen to die on the twenty ninth year where the balance on your mortgage has dwindled down to only $4,000 - this is the payout amount that your survivors will receive. As the potential payout decreases, the premium payments per month remain the same.
  • It can be expensive - especially if you look at the decreasing potential payout and the fixed premium payments.
  • It insures the lender - there are those who think that MPI policies actually benefit the mortgage lender more as it assures them their investments will be paid off.

By weighing the advantages and disadvantages, you can get an idea if MPI protection is for you.

Many experts agree that a level life insurance policy is a better alternative given the drawbacks of MPI. In the end, you need to look at your overall financial picture, as the mortgage is not the only thing your family would be preoccupied with once you are gone or when you have lost your ability to earn a living. There are other bills to pay other debts that need to be paid and these have to be considered, too.

Types of mortgage protection insurance policies

Mortgage Life Insurance - this policy fully pays off the home loan when the policyholder dies leaving the named beneficiary with the home free from having to pay the monthly mortgage payments. Usually, it is the lenders themselves who offer this coverage to the homeowner with the insurance premium added to the home loan payments.

Borrowers aged between 16 and 64 years can purchase this insurance.

The following three MPI policies are actually considered as riders or additional products to the standard life insurance policy.

Mortgage Disability Policy - here, the insurer takes care of the monthly home payments when the policyholder gets disabled. This will happen for a short period of time, which can be up to three years. Many employers offer this coverage to their workers.

Unemployment Protection Policy - this type of policy can cover your full mortgage payments or portions of it. Coverage can be up to eight months in one year. For many policies, payout is made on the 30th day since the policyholder has been laid off. Evidence of job loss is a basic requirement.

Critical Illness Policy - this policy takes care of mortgage payments when the policyholder suffers from severe medical conditions like cancer, kidney failure, heart attack, stroke, etc. When illness is at a very critical stage, the policy will pay off the mortgage.

This type of coverage is common in Australia and Europe. Recently, it has become popular in the U.S., too.

How to choose and save on mortgage protection insurance

As always, shopping around is a wise move. One important thing to consider when you comparison shop is whether the insurer allows conversion of the policy into a whole life policy.

Do check on the financial standing of the insurance company and research on consumer feedback.

Additionally, when considering MPI, do not forget that the mortgage will not be the sole concern of your surviving family. You also need to consider monthly living expenses, the education of your children, servicing of your other debts, etc.

For this, a level life policy may be more appropriate for you because there is no decreasing in value and is flexible enough to meet your family's other financial requirements. Moreover, a level policy allows a later reduction in the face value of the policy which translates to lower premiums. This reduction can be helpful if at a later point you found out you actually need a lower pay off value.

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