What Are Mortgage Protection and Term Life Insurance?
- Mortgage Protection Insurance (MPI) is a product that is specifically designed to pay off your mortgage in the event that you should die. This is not the same as Private Mortgage Insurance which pays the mortgage if you default on the loan. Term life insurance pays the mortgage off automatically only in the event of your death and only if you made the mortgage company the beneficiary of your insurance.
- There are two types of term life insurance typically purchased to protect your mortgage in the event of your death. One is a fixed-term policy that has a death benefit equal to what you owed on the mortgage when you took it out. You can also get decreasing term insurance, which has a death benefit that decreases each year at a rate slightly slower than your mortgage decreases.
- The benefit of term life insurance as opposed to Mortgage Protection Insurance is the cost. Term life insurance is cheaper. If you get decreasing term insurance, it is less expensive than a fixed term policy because as time passes, the amount of money the insurance company has at risk is lower than it is with a fixed term, which results in a lower premium.
- There are no regulations that require you to purchase either Mortgage Protection Insurance or term insurance. Determining whether you need it is a personal financial matter. A financial consultant can help you decide if it is something you may want to consider. If you have a life insurance policy, and it has a death benefit that you feel would be sufficient to cover your family's needs and pay off your mortgage, then you may not need it. On the other hand, if the cost of the additional insurance won't break your bank, it may be worth considering.
- If you purchase Mortgage Protection Insurance, it will automatically pay off your mortgage in the event of your death. If you purchase a fixed term life plan, and make the mortgage company the beneficiary, they will get, not only the amount needed to pay off your mortgage, but also whatever additional insurance is left after paying the mortgage off. If you make your family the beneficiary, they will have to pay off the mortgage with the proceeds. If you get decreasing term insurance, there will be less overage of your death benefit. In this instance, making the mortgage company the beneficiary has the least detrimental effect on your family, and will pay off your home with little or no intervention on their part.