We’ve always been protective as humankind – that’s in our nature. There’s no difference nowadays, especially if we take a closer look at our most valuable assets.
When we talk about material wealth, there is no way of avoiding real estate. Every homeowner is keen on protecting their property by investing in homeowners insurance.
An individual can choose the most suitable type of policy for their needs, and the options vary from traditional life insurance, over-term life insurance, and whole life insurance. One of the most appealing insurance products is Mortgage Protection Insurance.
In this article you will learn:
- What is Mortgage Protection Insurance (MPI policy)
- How does Mortgage Protection Insurance work
- What are the pros and cons of using MPI policy
- How to determine whether you need Mortgage Protection Insurance
- What are the alternatives to MPI.
If you stay focused until the end of the article, you will also get our expert advice from more than ten years of experience in this field. Let us dig into the topic of Mortgage Protection Insurance and help you choose the best type of policy to protect your loved ones!
What is Mortgage Protection Insurance?
This is the question we will be answering throughout the article.
Mortgage Protection Insurance (MPI policy) — also known as Mortgage life insurance — is a type of life insurance policy that policyholders buy to ensure the coverage of their mortgage payments in the case of their death or illness. Simply put, it’s an insurance option that should help your family pay the monthly mortgage payments in case you are not able to.
Mortgage Protection Insurance policy consists of several factors. There are monthly premiums to be paid, which usually vary depending on the amount of the mortgage, the policyholder’s age, and the level of good health.
It is essential to know that MPI covers only the principal and interest portion of a mortgage payment. This means that all other fees, such as property taxes, HOA dues, and homeowners insurance, would still need to be handled.
Mortgage Protection Insurance can play a different role in your life based on your needs.
In the case of your passing, an MPI policy can be used to pay off the remainder of your mortgage balance directly to your lender. That would bring peace of mind to your loved ones, as they wouldn’t have to worry about keeping their home.
Other MPI policies are designed to help you lower your monthly portage payments in case of a sudden job loss or severe disability that could stop you from working. Bear in mind that the policy terms depend primarily on the mortgage company and the term length, which means you would need to get the information directly from your insurer.
How does Mortgage Protection Insurance work?
Mortgage protection insurance is life insurance that pays off your outstanding mortgage balance if you pass away. The MPI policy owners usually purchase their policy when they buy their home or soon afterward, as it lasts the same time as the mortgage.
MPI is a type of term life insurance usually sold by insurance agencies cooperating with mortgage lenders. In some cases, you can purchase an MPI policy by independent insurance companies that use public records as a source for collecting information about your mortgage. It shouldn’t come as a surprise if you receive plenty of offers for mortgage protection insurance once you buy your home.
Policy terms are of high importance, as in any other life insurance policy. With most MPI policies, if you were to pass away during the policy term, the lender would receive the payout in the exact amount that you owed.
With every monthly premium you pay, your mortgage balance lowers, and the death benefit amount goes down with it. If having a level death benefit is of high importance to you, you can look for a few insurance companies that offer it. Pay attention to whether the death benefit decreases as the mortgage is paid off, as most policies should evolve in that way.
People often confuse mortgage protection insurance (MPI) with private mortgage insurance (PMI), which is not the same. The main difference you should be aware of is that mortgage protection insurance (MPI) protects you, while private mortgage insurance (PMI) protects the mortgage lender.
How is Mortgage Protection Insurance different from traditional life insurance?
There are similarities that you probably noticed so far. For example, there is a monthly premium to be paid to the lender in both of these policies. Monthly premiums ensure the coverage amount, thus contribute to your financial protection. They are a vital part of signing with any life insurance company, as they are the requirement for the coverage amount to be accessed.
On the other hand, some critical aspects differ mortgage protection insurance from traditional life insurance. One example is that the beneficiary of an MPI policy usually isn’t a policyholder’s family – as we’re used to with traditional life insurance. In the event of your passing, your family wouldn’t be granted a death benefit. Instead, the money would go directly to the lender to cover the balance of your mortgage.
This frees your family and loved ones from the mortgage payments, but it also limits them in spending the money for the most needed cause.
There is a debate whether mortgage protection insurance is the best option. On the one hand, many claim that the MPI policy gets all the credits for keeping your family in your home, especially since it’s quite a challenge to budget for a significant payout.
On the other hand, your family would not be able to lean on the insurance to cover other bills that can not be taken for granted. Not to mention the necessary bills that accompany policyholder’s passing, besides the re-occurring ones.
An additional argument is that MPI policies have guaranteed acceptance, with no underwriting process needed. This is especially useful to those who can not brag about shiny credit scores, good health, and risk-free job positions. Of course, this comes with a price of an MPI policy premium being higher than the traditional one for the same balance.
The last difference between MPI and traditional life insurance refers to the regulations. You should bear in mind that MPI policies come with a clause that states that the balance of your death benefit follows the balance of your mortgage. This means that the longer you make payments on your home loan, the lower your outstanding balance. The longer you hold your policy, the less valuable your policy is. This is quite a big difference from a life insurance policy, which usually keeps the exact balance for the entire term.
Additionally, some MPI companies have rules that determine when you are eligible for buying a policy. The usual practice is within 24 months after closing. Although, some mortgage companies would allow you to buy it up to 5 years after you close on your loan. The MPI company might also hold a right to deny you coverage based on your age. In conclusion, the regulations should be taken with high consideration to ensure choosing the best life insurance policy.
Advantages of Mortgage Protection Insurance
There is a reason we’re talking about mortgage protection insurance today and the reason why many homeowners are keen on purchasing this specific insurance policy. We highlighted the most important advantages of mortgage protection insurance.
No medical exam required
If you decide to purchase an MPI policy, we have good news for you! No medical exam is required when purchasing the policy. This is a relief for many borrowers whose health is not on the desired level.
Most people can qualify
Imagine a life insurance policy almost everyone can apply for and get it. It works like that with mortgage protection insurance – almost everyone can qualify. This means that MPI is a good option for people who have a history of illness or have been declined life insurance coverage for any other reason in the past.
An excellent supplement to life insurance coverage
Simply put, if the premiums are affordable and in a reasonable range, mortgage protection insurance can be an excellent supplement to the life insurance coverage you already have.
Peace of mind
Mortgage protection life insurance does not only bring peace of mind to your family and loved ones but also you – as long as you live. MPI policy is a rare life insurance policy that guarantees a payout or mortgage payment reduction in case of a health disability or job loss. With the pandemic and downsides it brought, an MPI is a refreshment in terms of financial security.
Disadvantages of Mortgage Protection Insurance
Everything has two sides of a coin. That is a case with MPI policy as well. We presented you with the advantages of purchasing this life insurance, and now we’re introducing you to the main disadvantages you should be aware of.
Mortgage protection coverage decreases over time
A trick with mortgage protection insurance is that you are usually locked on level premiums during the entire term of the policy, while the insurance payout amount decreases over time. This is a direct result of the fact that with every mortgage payment, the death benefit becomes lower.
Mortgage protection coverage is more expensive
Mortgage protection insurance might sound exciting and appealing at first glance, but make sure that you make your final judgment after learning all the facts. Mortgage protection coverage is more expensive than medically underwritten term coverage. This is a direct result of having a short and easy process of purchasing insurance – without taking any medical exams. To lower the risks, mortgage lenders increase their pricing.
Purchasing an MPI policy brings advantages but also takes cash out of your pocket. Monthly premiums require you to set aside additional money every month that could be used for other bills or investments you and your family would like to make.
Limited benefits in some cases
If you are on track with paying off your mortgage balance, you might realize that an MPI policy is generally not a good use of your money. This is since the loan payoff amount decreases as the mortgage is paid down. Although, if you want to research more on this topic – you should check refreshed MPI policies that might include a level death benefit, guaranteeing that your payouts won’t decline.
If you choose an MPI policy, you might find yourself losing an even better opportunity. With mortgage protection insurance, the death benefit is paid directly to the lender without giving your family or loved ones any options. Not having your family as beneficiaries might put them at risk or bring them uncertainty, which is probably something you wouldn’t want. Besides that, there are many other alternatives to mortgage protection insurance that could get you even more benefits.
Term life insurance vs. Mortgage Protection Insurance
We already explained the main differences between mortgage protection insurance and traditional life insurance. Now it’s time to cover how a mortgage protection insurance policy is different than a standard term life insurance policy.
If you choose term life insurance, you get to choose a coverage amount and term length that meets your family’s needs. Depending on what your primary goal is, you should choose a coverage amount that would pay off your mortgage and a term length that’s at least as long as the life of your home loan.
In our experience, covering the mortgage is only the beginning. Most of the borrowers are also looking for additional financial protection for their families, meaning that the mortgage protection insurance wouldn’t be sufficient.
An important thing you should think about is how valuable flexibility is to you. If you would like to choose the term length and coverage amount personally, then term life insurance would better suit you. Not to mention that it would be significantly cheaper, as there is an underwriting process in the place.
Here is the basic cost comparison over the years for you to get a more comprehensive picture.
Alternatives to Mortgage Protection Insurance
You are already familiar with the term life insurance, but we want to challenge you and introduce you to an even better concept called Infinite banking.
What is Infinite Banking?
There are many things that we could teach you about Infinite banking, but for these purposes – we’ve summarized the essential facts you should know.
The concept of infinite banking is about strategically using your whole life insurance policy from a mutual insurance company as a personal endless banking system. In other words, Infinite Banking is essentially being your own banker.
One of the many benefits of a whole life insurance policy is that policyholders can borrow money using their policy’s cash value.
Using this borrowing setup, you would never have to borrow money from a bank again and instead would borrow for yourself (your whole life insurance policy) and pay yourself back over time. Thus, being your own bank.
The goal of Infinite banking is to duplicate the process as much as possible to build the value of your own bank. The duplication process happens by lending and repayment of money typically held in the cash value of a permanent life insurance policy.
Infinite banking allows you to better work towards your individual and unique financial goals for yourself and your family and control your finances without dealing with banking fees or interest rates on loans.
The way infinite banking works allows you to mimic the way a bank operates and borrows money. Instead of borrowing from a bank, you borrow from yourself while still allowing your whole life insurance policy to earn dividends (money) even though you are using that money elsewhere.
How to become your own banker
To become your own banker, you need to start implementing the concept of infinite banking.
Infinite Banking involves:
- Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company
- Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life insurance policy
- Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.
If you want to learn more about becoming your own bank, you can check our YouTube video — How To Start Infinite Banking — to learn about steps you need to follow to start with infinite banking.
How to pay off a mortgage through Infinite Banking
Wealth Nation has prepared additional education for you, this time on the topic of how to pay off a mortgage through infinite banking.
If you want to learn more about how you can use the concept of infinite banking without taking any additional loan to pay off your mortgage completely, you can check the video we prepared for you.
We will show you on a practical exam how this could become your reality as well.
Benefits of Infinite banking
There are countless benefits of the infinite banking concept, but we summarized the most important ones for this article.
If you implement the infinite banking concept, you sign the contract with the life insurance company only. As you don’t have to deal with other financial institutions, the control of your finances significantly increases.
Infinite banking is not only applicable when it comes to paying off your mortgage. On the contrary, infinite banking can help you bring cash value over time and build your wealth. Every single time you make a premium payment, cash value accumulates inside your policy. The nice thing about having this cash value is that you earn a guaranteed 4% interest on this money. An additional benefit is that you can access the cash value any time you want and use it for any needs you have at the given moment.
This is the non-guaranteed portion of your contract premium, which is the dividends that are paid to you. As long as you work with a mutual insurance company, you could be paid a dividend each year. At the end of the year, if the insurance company is profitable and they’ve paid all their expenses, whatever is left is returned to the policy owners in the form of a dividend. We call that return a premium. The IRS does not tax you on these dividends, which is another bonus point regarding whole life insurance and infinite banking concept.
Riders are additional features and benefits that can be added to your policy for your specific needs. For instance, if you add a terminal illness rider and you’re diagnosed with a terminal illness, a portion of your death benefit can be utilized to cover your medical expenses. This is similar to a chronic illness rider, both of which give you benefits you can use while you’re still alive.
Because you put in after-tax dollars into a whole life policy, the cash value grows at a tax-free rate. That means that for the whole time you have your whole life insurance policy, you aren’t going to be taxed on any of the growth or even the cash value you utilize, as long as you request a loan. This brings a dose of security since you can never predict taxes in the future.
If you are interested in learning more about the benefits of whole life insurance, make sure you check our video and read our article on this exact topic.
And if you are wondering how you could use the concept of infinite banking in your life, make sure you go through 10 Ways to Use Infinite Banking.
Congratulations – you’ve made it to the end of this thorough article. We hope that you by now have a deeper understanding of mortgage protection insurance and can easily determine whether you should buy it or not.
Our honest advice would be to go with a whole life insurance policy and the infinite banking concept. If you want to learn more about how we make money through infinite banking and how you can, too – you can sign up for our premium membership. Looking forward to seeing you at the Wealth Nation community!