So you just closed on your mortgage and you’re beginning to settle into your new home (and your new loan). You’re assessing the many things that will need to be fixed and changed to make your house a home.
Then you receive an urgent notice in the mail regarding something called “mortgage protection insurance” or MPI.
Or maybe it’s referred to as mortgage payment protection insurance or mortgage life insurance protection. In any event, it looks pretty serious.
The seemingly important documentation might have come in an official-looking envelope that bears some sort of message like “final notice,” despite being the first and only notice.
Once nervously opened, you’ll be presented with a sales pitch that includes a lot of personal information, such as your name, your lender’s name, loan amount, record date, and a form that you’re urged to complete and return as soon as possible.
There’s also a good chance it’ll be printed on pink paper, which for some reason makes it all the more urgent.
But what you might not know, or what the company trying to sell you insurance might not make very clear, is that it’s an entirely optional third-party coverage, just like a home security system or a bottled water delivery service.
As a new homeowner, your physical mailbox will be inundated with solicitations like these. The misleading and unfortunate part is that these particular letters tend to look really official.
In fact, they seem to use every loophole in the book to make the letters look legitimate without actually breaking any rules – that’s why you’ll see lots of fine print and disclaimers, such as “not affiliated with Lender X.”
If you’re wondering how they got all your loan information, it’s via public records, not from your lender. So don’t call your lender to complain (about this at least).
What Mortgage Protection Insurance Offers
- Death benefit – pays off your mortgage in the event of, well, you know
- Disability – this so-called living benefit makes your mortgage payments in the event you can’t work
- Long term illness – if you get sick, a portion of the death benefit can be applied to your mortgage balance
- Unemployment – if you become unemployed, payments can be made via your policy coverage
- Money-back option – premiums returned if you don’t use the benefits by the end of your loan term
In a nutshell, it’s a form of insurance that covers your mortgage payments or pays off your entire mortgage balance in the event something happens to you.
It’s basically life insurance for your mortgage, though policies also include disability benefits so mortgage payments can still be paid in the event you can’t bring in a paycheck.
The fear tactic being employed is ultimately not losing the beloved family home. Who would want that, right?
You might be thinking, but I already pay mortgage insurance and homeowners insurance. What gives?
Well, mortgage insurance protects lenders from borrower default, and homeowners insurance protects the home, which is also in the interest of your lender that probably owns the lion’s share of the property.
Remember, if you take out a loan for 97% of its value, you own very little of the home. The bank is on the hook for a huge portion of it.
Anyway, this insurance is simply another thing you can pay for to protect yourself in the event something bad happens to the borrower, or breadwinner who is expected to pay the mortgage.
It’s entirely optional, like most insurance, and may never actually provide any benefit, other than maybe peace of mind.
If you speak to an insurance salesperson, they’ll likely recommend that you buy as much as you can reasonably afford.
If you speak to another individual, they’ll likely tell you that they’re not sure why they’ve been paying premiums for the past decade, but I digress.
The Cost of Mortgage Protection Insurance
As with any other form of insurance, the cost of mortgage protection insurance will vary greatly based on the size of the loan and the type of person you are.
For example, pricing will likely factor in your gender, age, health, and the level of protection you desire, similar to a life insurance policy.
And pricing can obviously diverge dramatically from a $100,000 mortgage to a $1,000,000 mortgage, as the monthly payment will be quite different.
In other words, monthly premiums can range from maybe $50 for a small loan amount and none of the extras, or $250 for a large mortgage with all the bells and whistles.
But you’d really just need to shop around as you would any other type of insurance to get accurate pricing.
Do You Need Mortgage Protection Insurance?
If you’ve made it this far, you might be wondering why you would elect to buy mortgage protection insurance if life insurance can accomplish the same thing (and possibly be much cheaper).
Also, standard life insurance can put money into your loved ones’ pockets, not the lender’s pocket.
The main reason individuals tend to buy MPI is because a physical exam may not be required. This is usually not the case with standard life insurance.
So someone might think they can pull a fast one on the insurance company. Here’s the rub though – when you don’t verify stuff, such as income and assets on your mortgage application back in 2006, you wind up with a higher rate.
That means the cost is baked in, even if you qualify with less hoops.
Aside from higher cost, the other downside to mortgage protection insurance is that the money goes toward the mortgage. Remember, not everyone wants to pay off the mortgage in full or ahead of schedule.
The survivors might have the means to keep making monthly payments or make other arrangements. And they might need the cash for other things.
Additionally, if the policy simply pays off the mortgage, the benefit actually decreases over time with the smaller outstanding balance, unless the policy payout doesn’t change with the amortization of the loan.
Of course, today’s policies seem to be more in line with term life insurance in that the proceeds can be used for just about anything. But that begs the question, why not just buy life insurance?
In summary, MPI is generally just a more restrictive policy, which explains why it’s not a very popular one. Throw in the fear tactics and sketchy solicitation letters and you see why it’s not too common.
(photo: Alan Levine)