What is Mortgage Protection Insurance?

How Does Mortgage Protection Insurance Work?

Mortgage protection insurance operates like term life insurance—you make premium payments for the duration of the policy term and are only covered while the policy is in place. Many insurers issue policies that are the same length as the term of the covered mortgage, but policies may be available in five- or ten-year increments. Once you reach the end of the term, you are no longer covered.

If you die during the coverage period, the death benefit is paid to the mortgage lender. Your loved ones will not directly receive any of the proceeds from the policy, but the policy will pay the mortgage in full so they do not have to worry about making house payments. Some mortgage protection policies also cover mortgage payments for a set period if you become unemployed or disabled.

Don't confuse mortgage protection insurance with other forms of mortgage insurance. The other types work to protect the lender if you default on the loan and are usually mandatory if you make a low down payment. They won't benefit your family if you pass away before your mortgage is paid in full. These types of mortgage insurance are:

• Private mortgage insurance (PMI): PMI covers conventional loans from a bank or credit union. Most PMI premiums are paid monthly and cost between 0.5% and 2% of the total loan amount.
• Federal Housing Authority (FHA) mortgage insurance: Also called a mortgage insurance premium, it covers FHA loans that do not require a large down payment. An upfront mortgage premium of 1.75% applies, and you'll pay an annual mortgage insurance premium between 0.45% and 1.05% for the life of the loan.
• U.S. Department of Agriculture (USDA) mortgage insurance: This covers USDA loans that don't require a down payment. A monthly mortgage insurance premium of 0.5% of the loan amount applies.

There's also homeowners insurance, which is another type of policy that covers your home and the personal property within it in cases of natural disasters, accidents, theft and other events.

Pros and Cons of Mortgage Protection Insurance

It's important to understand how mortgage protection insurance works and consider the pros and cons before deciding if a policy is right for you.

Some key benefits to keep in mind:

• Peace of mind: You may feel at ease knowing mortgage payments won't be a burden to your family if you pass away.
• Possibly cheaper than life insurance, a common alternative: Suppose you can't get affordable life insurance because of your age or health. In that case, a mortgage protection policy with affordable premiums may be a better fit.
• No underwriting: When you apply for life insurance, an underwriter will evaluate your application to determine how much risk you pose to the insurer. A medical exam is usually required, and if the results are unfavorable, you may be denied life insurance. Mortgage protection policies do not require underwriting and are generally easier to secure.

There are also drawbacks of mortgage protection insurance to consider:

• Limited death benefit: A term life insurance policy gives your family the flexibility of making mortgage payments and covering other expenses after you pass away. But mortgage protection insurance is limited in scope. It provides no tangible benefit to your loved ones beyond paying the mortgage in full.
• The value of the policy decreases over time: The premium payment will remain the same over the policy term; however, the death benefit will be reduced as time progresses to match the loan's outstanding balance.
• A life insurance policy may be the wiser move: Given that mortgage protection insurance will only cover your mortgage, and won't replace lost wages or cover end-of-life expenses such as burial, you may instead opt for a life insurance policy. A life insurance policy pays out if you die while the policy is in place, but the beneficiary can use the payment for anything—including the mortgage.

How to Decide Whether You Need Mortgage Protection Insurance

You're not required to purchase mortgage protection insurance—it's up to you to decide if this coverage is a worthwhile investment.

A policy may make sense if your finances aren't in tip-top shape and you don't have enough life insurance to cover the mortgage payments or pay off the loan if you pass away. However, you may not need mortgage protection insurance if you have a life insurance policy that can pay off the loan, cover your final expenses and replace your income for a set period. It also may not be a smart financial move if, on top of having adequate life insurance, you have job security and are in good health.

If you're undecided, consult with insurance professionals to learn more about your options and decide if mortgage protection insurance is a good fit for you, or if another type of coverage makes more sense.

Where to Get Mortgage Protection Insurance

Are you ready to purchase mortgage protection insurance? You can shop for policies through life insurance and private insurance companies. Also, check with your lender to see if they sell mortgage protection insurance—if not, they may be able to refer you to a company that can help.

Get several quotes and compare your options to ensure you're getting the most value for your dollar. Ask about bundle discounts if you're considering coverage through a provider that you already have another type of insurance with.