Mortgage protection insurance seems like a great idea on paper. After all, you financially protect your home, your car, your health, and your life with insurance. Why not do the same for what’s typically your largest debt obligation?
But a MPI policy might not be the best way to help your family pay off the house.
Here are five questions you should ask before you buy mortgage protection insurance.
Who is the Beneficiary?
The Beneficiary is the party that receives a death benefit. WIth MPI, the lender is the beneficiary. Sure, they will pay off the mortgage, but what if your family would prefer to use it for something else? Maybe, 20 years into the mortgage, your family would prefer to use the cash for your final tax bill, final expenses, your kids' university, or to take time away to grieve. WIth MPI, you don't have the freedom to choose the beneficiary.
Is it guaranteed to pay out?
MPI is not fully medically underwritten. It has a higher decline rate than policies that are underwritten for the insured's specific health history and thus contractually guaranteed to pay out. If you don't answer a detailed medical health history report, and take out the policy with a licensed insurance advisor, chances are, you have some gaps in your coverage that won't give you the peace of mind that insurance is meant to offer. Furthermore, if you are "younger" and "healthier" that an average person of your age and gender, your own personalized policy may cost less than a lender-based policy.
Will my payout change?
A fundamental weakness of most MPI policies is that their payout decreases over time. As you work down your mortgage, there’s technically less to protect.
That becomes a problem if your premiums don’t change even as your payout plummets. You’ll be paying the same amount for less protection!
Ask about policies that feature a level death benefit. They’ll provide you with the same amount of death benefit regardless of how much is left on your mortgage.
Will my premiums change?
Premiums for MPI aren’t always fixed. The amount you pay for protection each month might decrease or skyrocket. Your wallet is at the mercy of your insurance provider!
Just remember that fixed premiums might be a double edged sword. It may be useful to have a policy with premiums that lower over time if you don’t have a level death benefit. Ask about fixed premiums for your MPI before you find yourself paying more for less!
Would life insurance be a better option? (hint: the answer may be yes)
Term life insurance may be a better choice than MPI. Payouts are guaranteed by the insurance company and premiums are fixed. You won’t have to worry about paying more for less protection as the years go by.
It’s also flexible. A chunk of the death benefit may knock out the mortgage, while the rest can fund post secondary education, health care costs, and living expenses.
There are special circumstances where MPI is superior to term life insurance. It typically doesn’t have medical restrictions, making it a good option for people who normally wouldn’t qualify for term life insurance. Just remember to ask your financial professional these questions if you decide to learn more!
I encourage all of my clients to meet with a financial professional when making any major financial changes such as re-financing a home, having a child or before changing careers.