What Is Mortgage Life Insurance?
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After purchasing your home or refinancing your existing one, you might have noticed that your phone and mailbox are inundated with mortgage protection life insurance calls or flyers from your mortgage lender warning you that you haven’t taken advantage of the “mortgage-free” home for your family benefit and that you should act fast so that you won’t miss this exceptional opportunity.
That got you thinking, so you Googled mortgage life insurance and landed on this page. In this post, I will explain what mortgage life insurance is, why you should avoid it, and what you can do instead. Let’s dive in!
Related: Term life insurance advantages
What Is Mortgage Protection Insurance?
Mortgage protection insurance or MPI is a type of life insurance protection that pays your outstanding mortgage balance in the event of your death or other events (depending on the company) such as losing a job or becoming disabled.
The beneficiary is your lending institution (bank), and the death amount you can purchase is linked to the mortgage balance you owe. Additionally, you can choose either 15 or 30 years, and the death benefit will diminish over time as your mortgage balance would. So, mortgage protection insurance is a glorified name for a decreasing term life insurance.
It’s worth mentioning that you have no say on who will be the beneficiary, as the lender will be the one and not your family or loved ones. If you die, the insurance company will send the check to your mortgage company, leaving your beneficiaries with a paid-off home.
Don’t confuse mortgage protection insurance (MPI) with PMI, also called private mortgage insurance, which lenders use as a layer of protection in case you can’t pay your mortgage balance or go into foreclosure. To avoid paying for this, you need to pay 20% down payment when buying a house.
So, Why Again Should I Avoid It?
If the idea of putting your life insurance and mortgage under one roof, having no control over the death benefit amount, and the fact that your lender is your beneficiary doesn’t make you run away as fast as you can, let’s dig a little more to give you a few more reasons.
1. Mortgage Protection Insurance Lacks Basic Flexibility
- Choosing a death benefit amount: Whether you buy permanent or temporary protection, you, the policy owner, have full control over the death benefit amount, provided you can qualify for it based on your income and underwriting factors. (Typically, a 30-year-old can buy 30–40 times his yearly salary.) When purchasing mortgage protection insurance, your death benefit is a direct reflection of what your outstanding mortgage balance is.
- Choosing beneficiaries: It seems reasonable that, if I buy a life policy, I will be the one who decides how and to whom the money will be distributed when I’m gone. After all, I’m the one who pays for it, right? Wrong. When buying mortgage protection insurance, you have no say in who the beneficiaries will be because the lender will be the one who collects the funds if you pass away. Sure, the lender will pay off the mortgage, but your beneficiaries will have no alternative if they want to use the funds otherwise.
- You have no control over the policy’s length: Typically, when buying a temporary coverage, you can select anywhere from five to 30 years of coverage. With mortgage protection, you will have two choices: 15- or 30-year coverage.
2. An Outdated Product Which Is Also Way Overpriced
When I researched this article, I had a difficult time finding any rates or information about the companies who currently offer these products. I had called one company, and they said that they no longer provide mortgage protection and the only way to buy it is through my mortgage lender.
I finally found some rates online from a company called State Farm Life Insurance. I pulled some of the rates. (See below for the screenshots.) My concern was: Why is this so expensive compared to term life insurance? After all, they offer 15- or 30-year term insurance, but the rates are twice as much. The reason is simple: Mortgage protection life insurance is provided without a medical exam and has a limited underwriting process.
This means the carrier is taking an increased risk when insuring you by only asking a few health questions instead of evaluating your application extensively (more health questions and an exam), which results in increased rates.
3. How Do You like Having a Shrinking Death Benefit?
Yes, mortgage life insurance is a decreasing death benefit plan. As your mortgage balance decreases through the years, so does the death benefit amount. You might think that if the benefits decrease, so does your monthly premium, right? Not.
Your monthly premium will remain fixed until you pay off your mortgage. The only one who is benefiting in this situation is your mortgage lender who sells an overpriced life insurance policy while reducing the death benefit and keeping your payment fixed. Great deal for them, not you.
4. If You Refinance, You Will Have to Reapply
Since your mortgage life insurance is tied to your lender, anytime you choose to refinance your loan, you will have to reapply for another life insurance and risk paying more (if your mortgage balance is higher), or not getting coverage due to your health and age. For example, State Farm will not offer a 30-year mortgage protection if you are over the age of 45.
5. Too Many Exclusions and Fine Print
We are used to it these days. However, when it comes to mortgage life insurance, there are many exclusions you need to be suspicious about. Some institutions will approve your life policy without doing any underwriting because of “post-claim underwriting”, meaning they will do the underwriting AFTER your death and can deny your claim.
Some will pay for disability for the first two years, even if you are permanently disabled. I can go on and on, but I’m sure you get the point. By the way, a traditional life insurance policy has a two-year contestability clause if you die within two years of buying a policy, in which they can go and investigate the death.
6. Less Transparency—Try Getting Online Quotes
I’m an insurance broker, and I had a troublesome time finding mortgage life insurance rates online. I’m saying this because I’m in the industry, know the ins and outs of life insurance and couldn’t get the rates.
My question is, “Why?” They all come with the argument that they need to know the mortgage balance, that I need to call the lender directly if I want to get a quote, and many other excuses. If the product isn’t available for me to see online, this is a huge red flag.
7. Mortgage Isn’t the Only Thing You Need to Protect
Your mortgage may be the most significant investment, but what about your spouse and children being able to live without your income? Sure, they will have a paid-off house but how do they pay the property taxes when they have no source of income? Better yet, how do they pay the day-to-day expenses, college expenses, car payment, etc.
If they don’t have any income to live on, they may be forced to sell the house, which is ironic because that’s what you intended to protect, isn’t it? A traditional policy can do just that: pay off your mortgage and leave enough money for your heirs to use as they see fit.
The One and Only Benefit of Mortgage Life Insurance
Mortgage life insurance has a minimal underwriting process without the need for an exam or extensive health questions. Frequently, lenders allow it on a guaranteed acceptance basis, but you may need to read the small print on the payout or the type of life insurance, as some may offer only accidental death benefit insurance.
This is a massive advantage for those who can’t otherwise qualify for traditional life insurance because of pre-existing conditions. Now, keep in mind you can still apply for a no-exam life policy if you don’t like the needle. Don’t just jump and buy a mortgage protection plan because it doesn’t require you to take the exam. Lastly, convenience equals higher premiums. Are you willing to pay for convenience?
Here Is What to Do Instead
If you are reasonably healthy and can qualify for a traditional coverage, you can choose a temporary or a permanent coverage. If you are solely after insuring your mortgage balance and nothing else, get a term life insurance policy for as many years as your mortgage is. Let’s explain more about your options:
1. Term Life Insurance
As the name implies, term life is a temporary coverage for a specific length, typically 5–30 years with the most common one being a 20-year term. Your death benefit and premium are guaranteed to remain fixed throughout the initial term length.
At the end of the term, you can convert the policy to whole life without proof of insurability, continue the coverage on an annual basis until the age of 95 (in most cases), or drop the coverage because you don’t need it anymore. Unlike mortgage life insurance, this is very affordable coverage with a level death benefit, not a decreasing one.
Related: Sample term life insurance rates
2. Ladder Strategy
The main argument against buying term life is that it doesn’t last forever, and if you try to qualify for a new plan in the future, you may not be in the best of health and may get denied or pay substantially more for a coverage. The other option you have is to buy a permanent policy such as whole life or universal life insurance which will last forever or until your death.
However, this type of protection will cost 10 or 15 times what term life does. This is where laddering strategy can help. The idea is simple: You need the most coverage when you are in your younger years. These are the critical years because death in these years will cause a catastrophe to your heirs. The older you are, the less life insurance you need because your children are older now and do not depend upon you financially, the mortgage is paid off, and you were able to save some money which allows you to be self-insured.
Here is where stacking or layering policies makes sense: Buy the highest amount of coverage when you are young and healthy. For instance, instead of buying a million-dollar 30-year term in one policy and getting stuck paying for it for 30 years, buy a $500,000 for 30 years, $250,000 for 20 years, and another $250,000 for ten years. Not only will this save you money on the policy, but every ten years, one policy will drop, and you will pay less every month while keeping the most necessary amount, $500,000, for the rest of the 30 years.
Another way of doing this is to buy a small whole life (permanent coverage) when you are young because prices will be lower and layer it with large term policy that will be a lot cheaper but will offer a higher protection for 20 or 30, years depending on your situation and needs.
3. No-exam Life Insurance
If you still like the idea of getting life insurance without an exam as part of the underwriting process, there are a few companies, such as North American or Banner Life, that can offer up to one million dollars in face value. Note, you still need to be relatively healthy and under the age of 50 years old to qualify for these types of plans.
Nonetheless, even with average health, you can find companies such as SBLI who offer up to $500,000 without the use of the needle. This is where talking with an insurance broker could help you make the right choice and save some money. Companies and underwriting processes change often, and a broker’s job is to stay on top of these changes to make your life easier.
If you can’t qualify for a traditional policy and your only option is obtaining mortgage life insurance, buy it. It’s better than nothing, and at least your family will have a paid-off house should you unexpectedly pass away.
The fact that I couldn’t get mortgage life insurance rates online should make you run to the hills and never look back. Anytime there is less or no transparency, particularly in the insurance environment which is inherently confusing, you should be alarmed. If you can’t get the rates online while searching on Google in this day and age, it isn’t a good sign.
Lastly, if you need life insurance, talk to an insurance broker; if you need a mortgage loan, talk to your lender. Do not confuse the two. You can use our quote engine on the right-hand side of this page to compare the rates yourself.