Mortgage Protection Insurance vs. Term Life Insurance: Pros and Cons to Consider
When you take out that home loan, it gets recorded in the public records of your locality.
This way, others can know your house is encumbered by a lien to the mortgage lender.
The public lien prevents you from taking out multiple mortgages and running off with the money, scamming the banks.
One downside of the public nature of these documents is anyone can access them.
Chances are, you started receiving mailers at your new home advertising certain services and products.
You probably received plenty of offers for mortgage protection insurance.
The companies that send these mailers try to make them look urgent and official, but they aren’t.
It’s a sales tactic to try to get you to buy.
But is mortgage protection insurance worth it?
Or would a simple term life insurance policy be a better deal?
Which is the Smarter Choice?
For the vast majority of people, term life insurance will likely be the wiser choice.
It’s more flexible, likely cheaper, and doesn’t require using shady tactics to sell it.
Mortgage protection insurance does have its place in certain circumstances.
If you can’t get approved for a term life insurance policy but can get approved for a mortgage protection insurance policy, some life insurance is better than no life insurance.
Similarly, it may make sense from a simplicity standpoint to have mortgage protection insurance pay off your mortgage.
This is especially true if you’re worried your beneficiaries may not use the money as you intended.
What is Mortgage Protection Insurance?
Mortgage protection insurance is a type of insurance product. It’s a very specific form of life insurance.
This insurance is in force for a set term that usually coincides with the length of your mortgage.
If you die, the life insurance company will pay off your mortgage loan balance in full.
That sounds good on the surface, but digging deeper exposes flaws.
Premiums and qualifying for insurance
First, mortgage protection insurance is typically more expensive than a similar term life insurance policy.
This type of insurance doesn’t normally require a medical exam, so this is one reason the policies are more expensive.
Healthy people and even some with minor health conditions may secure lower rates by getting a term life insurance policy with a medical exam.
When you make mortgage payments, your balance owed declines over time.
This means the death benefit of the mortgage protection insurance will decrease over time, too.
It only covers your mortgage payoff amount at any given time.
The policy you take out won’t pay your family members if you die.
Instead, the mortgage company is listed as the beneficiary.
This does mean your mortgage will be paid in full, but your family may have better uses for that money when you pass away.
Confusion with private mortgage insurance
Mortgage protection insurance also uses the same acronym letters as another type of insurance you may be required to carry.
It’s easy to confuse mortgage protection insurance (MPI) with private mortgage insurance (PMI).
If you didn’t make a large enough downpayment on your home, your lender might require PMI.
Lenders don’t require MPI.
Mortgage Protection Insurance Pros & Cons
Where to Get Mortgage Protection Insurance
Your lender may know or suggest mortgage protection insurance providers.
After all, the insurance protects the lender so they have an interest in you getting a policy.
Chances are you’ll receive several mailers about mortgage protection insurance shortly after closing on your home purchase.
You can compare these offers to find the best one for your situation.
You may also be able to get quotes through life insurance companies.
Some life insurance companies may offer a term life insurance policy, instead.
What is Term Life Insurance?
Term life insurance is a more traditional life insurance coverage.
It’s one of the cheapest life insurance options you can choose.
Pick your term and death benefit
Term life insurance stays in effect for the term, or length, of the life insurance policy.
If you die during the term, the death benefit gets paid out.
No death benefit is paid out if you don’t die, though.
In this case, you receive nothing for the premiums you paid other than the benefits the policy would have offered if you did die during the term.
The good (obvious) news is you’re still alive.
You can choose your term to fit your needs. If you want it to last the length of a 30-year mortgage, you can take out a term life insurance policy that stays in effect for 30 years.
If you’re getting a life insurance policy when you’ve already had a mortgage for a few years, shorter options also exist.
The other piece of good news is the death benefit isn’t tied to your mortgage balance.
Instead, you get to pick a death benefit amount that stays the same the entire life of the policy.
You could purchase just enough coverage to pay off your mortgage.
If you die ten years down the road, you still get the entire initial amount.
Your family should be able to pay off the mortgage with money to spare.
Many people purchase more life insurance to cover other needs.
For instance, your family may need to replace your income if you were the breadwinner.
Alternatively, some people may want to have enough insurance to pay for college costs for their children, too.
The application process
When you apply for a term life insurance policy, the company will likely ask questions about your health and family medical history.
They use this information to price your policy. They may also ask you to take a medical exam, but not all term life insurance policies require this.
Term life insurance policies that don’t require a medical exam usually cost more than those that do.
Your premiums will be based on your health, family history and medical exam results, if applicable.
Insurance companies also use several other factors to price their policies.
If you’re too high of a risk, the insurance company may deny your application altogether.
When you take out your policy, you choose beneficiaries. This won’t be your mortgage company.
Instead, you choose who the beneficiaries are, which will likely be a spouse or your child’s guardian.
Term Life Insurance Pros & Cons
Where to Buy Term Life Insurance
You can shop for and buy term life insurance in many different ways.
Insurance salespeople normally sell life insurance from one specific company they represent, such as State Farm.
If you already have other insurance policies with a company, you may decide you want to keep your life insurance policy there, too.
It makes life easier and is simpler all around, but you may not get the best rates.
Insurance brokers take things to the next level.
Insurance brokers can get life insurance quotes from several life insurance companies.
They can help you shop around to find the best policy for you in terms of coverage and rates.
Each insurance company may pay different commissions, though, which could influence which companies the broker recommends.
If you prefer to do the shopping yourself, online life insurance websites make this easy.
You can visit each individual life insurance company’s website to get quotes yourself.
This process is a bit painstaking as it requires filling out the same information multiple times.
Thankfully, online life insurance brokers make this easier.
For instance, Policygenius allows you to fill out your information once. Then, they provide you with potential insurance offers from several top providers.
If you find a quote you like, you can move forward with the application process to determine your exact rate.
If you’re happy, you can then purchase the policy if they offer you one.
Mortgage protection insurance and term life insurance can both meet the same need.
They can both provide money to pay off your mortgage if you die while you still owe on it.
Unfortunately, mortgage protection insurance has several drawbacks that make it an inferior product in most cases.
Instead, most people would likely be better off purchasing a term life insurance policy.
It never hurts to shop around for life insurance quotes for both types of policies, though.
Doing so can help you compare the costs of both types of policies based on your situation to see which is truly best for you.