Taking out a decade-long mortgage is a significant financial commitment for many homeowners, and it always pays to be protected while making such a substantial investment. There are several approaches to this task. Home and contents insurance, for example, protects homeowners from the worst-case scenarios that could occur to their homes. Then there is the MPI, also known as mortgage protection insurance.
Mortgage protection insurance serves as a safety net to cover your monthly mortgage payments if you cannot make them for a variety of reasons. It can keep you from having to default on your mortgage and, as a result, keep your property from being repossessed. While the added security seems appealing, MPI isn’t for everyone. So when does it make sense for you to buy one?
Mortgage protection insurance- What is it?
Mortgage protection insurance is a policy that assists in making monthly mortgage payments if you cannot work due to illness, significant injury, or redundancy. This insurance is also termed as MPPI (mortgage payment protection insurance).
Your insurance will pay you a predetermined amount each month after you’ve been out of work for a certain amount of time (usually 30 to 60 days). You could be able to acquire coverage for your bills as well, which means the provider will generally cover 125 percent of your mortgage.
However, you must have the insurance in place for an exclusion period, which is usually between 30 and 60 days, before you can make a claim. Furthermore, you will only be paid for up to 12 months or two years, depending on the insurance. Mortgage protection insurance differs from payment protection insurance in that it protects mortgage repayments and pays you directly rather than the lender if you need to make a claim.
Benefits of an MPI
According to some experts, Obtaining MPI can give an additional layer of security for individuals who require it. Here are some of the advantages of purchasing this type of insurance:
The MPI policies are guaranteed to be accepted. Your health and occupation determine the monthly cost of a term life insurance policy. You may bypass the underwriting procedure with MPI insurance because most plans don’t need policyholders to undergo a medical exam. This can be pretty useful if you’re unwell or work in a risky or high-risk profession. However, it also implies that, for the same amount, the average MPI premium is more than a life insurance policy. This can entail paying more money for less coverage for persons in excellent health who work in low-risk occupations.
Another advantage of MPI is that it eliminates the guesswork involved in repaying a mortgage. It might be challenging to accept a lump sum payment from a standard term policy. MPI is matched to the mortgage balance, and the funds will only be used for that purpose. Your family will never have to be concerned about a lack of housing.
Cons of an MPI
Despite the benefits, industry experts say there are various reasons to avoid MPI and that term life insurance is a better option. These are some of the reasons:
Little or no Flexibility
Mortgage life insurance products do not give the same level of Flexibility as term life insurance. Of course, it’s fantastic to be able to pay your mortgage, but you’ll be doing so at the price of your family’s other expenses and obligations.
While the death benefit might alleviate the financial strain of paying a mortgage, your family may still be saddled with debts and other obligations. Your family can benefit from a standard life insurance policy to pay off the most pressing debts, such as home payments, other loans, or college tuition, thus offering you Flexibility.
Mortgage protection insurance payouts fall when homeowners pay down their mortgage debt, and with premiums remaining the same, policyholders may wind up paying more for less coverage. If your policy offers flat premiums, you must pay the same premium for a lower face value every month. That implies that even if the coverage value decreases, the amount you pay each month remains the same.
Premiums are high
Another downside of purchasing an MPI coverage is the high rates, which result from avoiding medical exams and the underwriting procedure. The less an insurance company learns about you, the greater the risk they take in insuring your life. Mortgage life insurance is usually more costlier than the medically approved term life insurance because of the additional risk.
Do you need MPI?
MPI isn’t necessary, and it’s not necessarily the most cost-effective option. However, using the DIME (debt, income, mortgage, education) technique, which considers your mortgage when determining how much life insurance to buy, you may acquire equivalent coverage with a suitable life insurance policy. To use the DIME technique, follow these steps:
- Add up all of your outstanding debts, including your mortgage balance, your income, and your children’s expected college costs.
- Subtract whatever current insurance coverage you have from the total. You have ample coverage if there is a surplus. If there is a gap, that is the amount of life insurance you should get.
Where can you get MPI?
If you still believe MPI is a good fit for you, you can purchase insurance in several ways, including:
- Through your mortgage lender.
Your mortgage lender may offer you an MPI policy when you close on your loan. However, if your lender doesn’t provide MPI coverage, you might be able to get a reference from a representative or your real estate agent to a business that does.
- Through private insurance firms.
Several private insurance providers offer MPI plans. Depending on your state, the firms you’ll be able to work with may differ.
- Through a life insurance company.
MPI is offered by several firms that sell life insurance plans. You might be able to save money by combining insurance coverage if you have another form of insurance with a national insurance provider.