Mortgage Protection Insurance vs. Term Life: What's the Difference?
Know the difference (and what to investigate) before you buy
Whether you’re a new homeowner or you’ve been repaying your mortgage for a while, you can financially protect your home through a few different insurance options. If you’re a new homeowner, you may have recently received an offer of mortgage protection insurance in the mail. It may come in the form of a postcard, or even look like it comes from your lender.
Both mortgage protection insurance (sometimes called mortgage life insurance) and term life insurance can pay your mortgage if you die, but they aren’t the same. Here’s what they are and how to determine which one you should get.
Although they share letters, mortgage protection insurance (MPI) isn’t the same as private mortgage insurance (PMI). PMI is required when you buy a home with a conventional mortgage and a down payment of less than 20%. Once you hit 20% in equity, the PMI falls off, but it protects your lender in case you don’t make mortgage payments.
Term Life Insurance Explained
Term life insurance is relatively straightforward. It’s an insurance policy for a set amount of time (or a term), such as 15, 20, or 30 years, and pays a tax-free death payout (or benefit) if you die within the period covered.
The death payout can be used in any way by the beneficiaries, whether to pay off your mortgage, cover college costs for your children, or cover funeral expenses. Typically, both the premium (the amount you pay for the policy) and the payout remain the same throughout the term.
If you already have a term life insurance policy, you may have enough coverage to pay off your mortgage.
Mortgage Protection Insurance Explained
After buying or refinancing a house, information about the transaction becomes public record. So you may soon receive offers in the mail for “mortgage protection insurance.”
With standard mortgage protection insurance (MPI), if you die while still paying down your home loan, mortgage protection insurance intends to pay off your outstanding debt with your mortgage lender. If you become disabled, critically ill, or lose your job, some policies make your mortgage payments for you.
The mortgage insurance amount decreases along with the amount you owe. However, your premium often remains the same. If you get mortgage protection insurance, your premium (the amount you pay) is based on many factors, including your age, health history, home’s value, and how much you still owe.
Some mortgage insurance offers you receive may be worth considering. For example, Veterans’ Mortgage Life Insurance may cover your mortgage up to $200,000 in the event of death, if you’re a service member or veteran with service-related disabilities and made modifications to your home. You can find out more about this type of insurance directly from the U.S. Department of Veterans Affairs.
Other offers may come from less-trustworthy sources who may use any personal data they gather for identity theft. Or they may try to coerce you into buying through the use of official-sounding wording like “final notice” or falsely give the appearance that they’re from your lender. Others only cover accidental death—when dying of natural causes is more more likely, statistically.
When you’re shopping for a mortgage, some offers might come from a lender, perhaps called “credit life insurance.” The Federal Trade Commission (FTC) suggests asking lots of questions about this insurance. Report the lenders to the FTC, your state attorney general, or state insurance commissioner, if you’re told you can’t get a loan without credit insurance.
Term Life Insurance vs. Mortgage Protection Insurance
Mortgage protection insurance is designed to protect your mortgage payments if you become disabled and can’t work, lose your job or pass away, said Bob Fee, president of the Kansas-wide Fee Insurance Group, as told to The Balance by email. But it’s not usually the best option for most people.
“Most traditional life insurance companies would tend to believe that purchasing a 20- or 30-year term life insurance policy, along with disability insurance, makes more financial sense than purchasing a reducing term policy,” Fee said.
“If you purchase a $200,000, 30-year term life policy and pass away in [year] 15, your beneficiaries receive the full $200,000 despite what you have left to pay on your mortgage,” he said. “You have taken care of multiple needs, and are not just satisfying the mortgage company and their needs.”
The Consumer Financial Protection Bureau (CFPB) urges caution when receiving mortgage protection insurance offers. The CFPB notes many homeowners are “better off” with standard term life insurance, which is less expensive and more flexible.
The Bottom Line
When considering mortgage protection life insurance from an unknown company or a company possibly using deceptive practices, investigate carefully. If there are many complaints and concerns, look elsewhere for mortgage protection insurance or consider another type of protection.
If you want to make sure your family is covered beyond your home, then term life insurance might be a better investment. The payout can go towards other expenses outside your home loan.
Before signing up for mortgage protection insurance, ask these questions:
- Is the company offering the insurance licensed with your state’s insurance department?
- How is the company rated with the Better Business Bureau?
- How is the company reviewed on Yelp or other online review sites?
- Can you find evidence of the business address and a business license? How long has the business been around?
- Does the offer letter threaten you in any way or request personal information?
- Does the insurance policy cover all causes of death or accidental death only?