“After closing on a mortgage, many individuals immediately begin receiving daily solicitations in the mail, urging them to purchase mortgage protection life insurance (MPI). Simply put, MPI is a type of life insurance sold by banks affiliated with lenders, and by independent insurance companies, who obtain information about a person's mortgage through public records.”
MPI (mortgage protection life insurance) offers are often disguised as official and formal requests from mortgage lenders, with convincing details, like the lender’s and borrower's names, the loan type and the amount owed. In bold lettering, these documents lead with shocking headlines like:
IMPORTANT NOTICE! PLEASE COMPLETE AND RETURN!
FINAL NOTICE! MORTGAGE PROTECTION CARD!
NOTICE OF OFFERING! MORTGAGE FREE HOME PROTECTION!
Investopedia’s recent article entitled “Why You Don’t Need Mortgage Protection Life Insurance” explains that these declarations are then followed by scare tactic statements such as, “If you died tomorrow, would your family be able to continue paying the mortgage and maintain their qualities of life?”
They then give you programs claiming to protect families, after a death, by paying off mortgages.
However, mortgage protection life insurance policies are generally not worthwhile. Here are several reasons why:
- No flexibility: With regular term life insurance, beneficiaries may use insurance payouts as they see fit, but many MPIs send benefit payments directly to lenders and the beneficiaries never see any money.
- Large premiums: Even if you’re a healthy person who has never smoked tobacco, MPI is usually more expensive than term life insurance.
- No transparency: It’s hard to get a quote for MPI online—a major concern, since mortgage MPI prices can vary widely.
- Fluctuating premiums: MPI premiums may only be fixed for the first five years, then they could spike.
There are some MPI policies that do offer policies with fixed premiums for the policy’s duration, but in many instances, the payout on these policies may decrease over time as potential payouts are lowered. This type of MPI life insurance—also called “decreasing term insurance”—is designed to pay off your mortgage balance, while each month your beneficiary pays down part of your mortgage principal. The MPI policy’s potential payout, therefore, shrinks with every mortgage payment.
However, some newer MPI policies have a feature known as a "level death benefit.” These policies’ payouts don’t go down. Some MPI policies will also return your premiums, if you never file a claim after you pay off your mortgage. However, the returned premiums will probably be worth far less because of inflation. You will also have likely forfeited the opportunity to invest any money you would’ve saved, if you’d bought less expensive term life insurance.
An MPI policy may be a good idea for those who don't qualify for term life insurance due to poor current health, because MPI is typically sold without underwriting.
MPI is totally different from private mortgage insurance (PMI), which protects your lenders, not you. If you make a down payment of less than 20% on your home, you pay monthly premiums to a PMI policy that will pay your lender, in case you default. However, if you die, your heirs must keep making mortgage payments, and PMI only kicks in if family members default.
Reference: Investopedia (June 25, 2019) “Why You Don’t Need Mortgage Protection Life Insurance”