Buying a home is a long-term financial investment. But what tends to happen if you die unexpectedly? Will your family’s savings be sufficient to cover mortgage payments? That is where mortgage protection insurance comes to play as a viable means of insurance for mortgages.
Mortgage protection insurance is a type of insurance policy that protects your home loan in the event of your death, with some policies also protecting mortgage payments if you become disabled. With a policy term of up to 40 years, it provides declining coverage that gradually decreases as you pay off your mortgage.
Unlike a traditional insurance policy, the lender will receive the payout in the event of the policyholder’s death, which will be used to pay off the remaining lifetime mortgage on the home.
Continue reading to find out more about how mortgage protection insurance works, the key benefits and drawbacks, and whether it’s a worthwhile policy to have.
What is Mortgage Protection Insurance
Mortgage protection insurance is a type of life insurance policy that you purchase specifically to pay off your mortgage if you die. As a result, if you die, your beneficiaries will be able to continue living in your home without having to worry about repaying a loan.
When you apply for a mortgage protection insurance policy, you are quoted a price based on the likelihood that you will die while the policy is in effect. This includes your age, gender, and current health situation.
The payout on most mortgage insurance policies gradually decreases to match the remaining balance on your mortgage loan. This means that the policy’s value decreases over time, even if your premiums remain constant.
When you purchase a term life insurance policy, your death benefit remains constant for the duration of the policy, unless you change your coverage.
Is mortgage protection insurance worth it in the UK
Mortgage protection insurance may be worthwhile for some people, but it may not be worthwhile for others in the UK. Because this policy is quite rigid, it might not be an ideal option for beneficiaries that need funds to spend on urgent financial needs. For such a category of persons, it is ideal to obtain term life insurance with a payout that goes directly to a family member rather than the lender.
Your beneficiaries can choose from the following options if you have a term life insurance policy:
- Pay off the remaining mortgage balance and use the remaining funds for other purposes.
- Skip paying the mortgage, allowing the property to go into foreclosure, and spending the money on other financial needs.
- In addition, with a term insurance policy, you get a lower premium.
Mortgage protection insurance, on the other hand, can be a good option for people who have pre-existing health concerns or disabilities and want the convenience of an insurance policy that does not require a medical exam.
Mortgage protection is also a good insurance policy to have in addition to life insurance. For example, if a loved one dies, mortgage protection insurance will pay off your mortgage and allow your family to benefit from the full payout of the other life insurance policy.
Pros and Cons of mortgage protection insurance
Pros of mortgage protection insurance
Here are the benefits and drawbacks of Mortgage Protection Insurance to help you understand it better:
- Acceptance is guaranteed
- Provides certainty
- A good addition to life insurance coverage
- Disability coverage
- Your mortgage balance is matched by the policy payout
- Peace of mind
- No underwriting
Acceptance is guaranteed
One of the benefits of purchasing mortgage protection insurance is convenience; anyone can purchase a policy, and no medical exam is typically required during the underwriting process.
This is especially beneficial for those who have a pre-existing condition or illness that either disqualifies them from other types of life insurance or raises their life insurance rates to unaffordable levels.
However, while skipping the underwriting process may increase the cost of coverage, it may be worth it in some cases.
Provides certainty
Another advantage of MPI is that it takes the guesswork out of repaying a mortgage. Receiving a lump sum payment from a traditional term policy can be intimidating.
A good addition to life insurance coverage
Mortgage protection insurance can also be a useful addition to life insurance coverage.
Disability coverage
A mortgage is likely to be the most significant debt you will ever incur in your life.
Before you sign up, consider this: “If I sustain an injury that prevents me from working, would I be able to pay monthly mortgage payments with the money in my emergency fund for three months, six months, a year, or even longer?”
If the answer is no, you might benefit from a mortgage insurance policy. Some policies provide payments if you lose your job or become disabled for a limited time. You could also look into disability insurance. Disability insurance will undoubtedly protect you if you become disabled.
Your mortgage balance is matched by the policy payout
If your loved ones receive a large lump sum, they may struggle to properly allocate it.
However, with mortgage protection insurance, your loved ones won’t have to worry about whether there will be enough money to cover the mortgage balance.
The proceeds of the policy are paid directly to your mortgage lender and cover your entire outstanding balance.
Peace of mind
You may feel relieved knowing that your mortgage payments will not be a burden on your family if you die.
No underwriting
When you apply for life insurance, an underwriter will assess the risk you pose to the insurer. In most cases, a medical exam is required, and if the results are unfavourable, you may be denied life insurance. Mortgage protection policies are generally easier to obtain because they do not require underwriting.
Pros of mortgage protection insurance
Mortgage Protection Insurance is not a good idea for some people, and here are the reasons:
- Lack of flexibility
- Decreasing payout
- Higher premiums
- You can’t select the beneficiary
- It covers only one financial need
- More restrictive age limits
Lack of flexibility
Mortgage life insurance policies do not offer the same level of flexibility as term life insurance coverage. It’s great that you can cover your mortgage payments, but you’re doing so at the expense of your family’s other debts and bills.
While the death benefit can alleviate the financial stress of mortgage payments, your family may still be saddled with bills and other debt that they cannot afford. With a standard life insurance policy, your family can use the payout to pay off the most pressing bills, such as mortgages, other loans, or college tuition.
Decreasing payout
As homeowners pay off their mortgage balance, the payout on mortgage protection insurance decreases, and with premiums remaining constant, the policyholder may end up paying more for less coverage.
If you’re wondering if you still have to pay the same premium every month for a lower face value, the answer is yes if it has level premiums. That is, even if the policy’s value falls, the amount you pay each month remains constant.
Higher premiums
Another downside of purchasing an MPI policy is the high premiums, which Burgett explained are the result of skipping medical exams and the underwriting process.
Generally, the less an insurance company knows about you, the greater the risk they take in insuring your life. Because of this added risk, mortgage life insurance is usually going to be more expensive than a medically underwritten term life insurance policy.
You can’t select the beneficiary
Mortgage insurance is not a flexible product. You have no say in who receives the payout. That has been decided from the beginning and cannot be changed. Even if your family has more pressing needs, such as paying medical bills, your lender will receive the policy proceeds after your death.
It covers only one financial need
A mortgage protection policy has a single purpose. It ensures that your family does not lose their home following your death.
However, it will not meet their other financial needs, such as covering their day-to-day living expenses after you are no longer able to provide for them. If you want to ensure that your family can live comfortably after you die, you may need to purchase another life insurance policy.
More restrictive age limits
Mortgage insurance typically has lower age limits than term life insurance. Some insurance companies, for example, are hesitant to issue a 30-year policy to an applicant over the age of 45.
FAQs about Mortgage Protection Insurance
What type of insurance is alternative to mortgage protection insurance?
A traditional life insurance product, such as a term life insurance policy, is typically the best option for mortgage protection for people in good health.
What exactly is the distinction between life insurance and mortgage protection?
The primary distinction between Mortgage Protection Insurance and Life Insurance is that Mortgage Protection Insurance is designed to cover only your mortgage payments in the event of your death. Life insurance, on the other hand, is primarily intended to protect you and your family.
What is mortgage protection insurance?
Mortgage protection insurance (MPI) is a form of life insurance that pays off your mortgage if you die — and some policies also cover mortgage payments (usually for a limited time) if you become disabled.
