Should I Buy Mortgage Protection Life Insurance?

You guys were right. Less than a month since we closed on our mortgage loan, we are already getting bombarded with letters offering “mortgage life insurance”. The official-looking letters seem like they are from your lender, but are really just another piece of junk mail.

The pitch is pretty simple – it will pay off your entire mortgage in the event of your death. You don’t want your family to lose their home, do you? *sniff* *sniff* If I do it soon, I don’t even have to submit to a medical exam. (This is not the same as Private Mortgage Insurance or PMI, which is to protect the lender when you have a small downpayment.) The problem is that it’s usually a better idea to simply buy a plain term life insurance policy with a comparable or greater cash payout. Here’s why:

Term Life Insurance Offers More Flexibility
So let’s see, if I buy mortgage protection insurance and die then my loan is paid off. What about the rest of the monthly bills? Childcare? The house isn’t everything. Wouldn’t you rather leave your family a lump sum of cash to do whatever you want with, rather than have a paid-off home with all of the equity stuck inside? They could even buy an annuity to replicate your income.

Mortgage Life Insurance Has A Shrinking Payout
Remember, this insurance only covers the mortgage. As the years pass, you keep paying premiums, but your loan balance keeps on shrinking! After 10 or 20 years, your benefit will be greatly reduced. Compare this with most term life insurance policies which offer a fixed payout.

Oh, and don’t be fooled by a “return of premium” (ROP) feature. Sure, they’ll refund 100% of your premiums at the end of the term. Not only does this cost more than non-ROP insurance, but that’s ignoring the fact that in the meantime they’ve been investing your premiums and making lots of money off of it (which you could have been doing instead). And if you miss just one premium payment you’ll be disqualified.

Term Life Insurance Is Probably Cheaper
Insurance is all about statistics. If the policy requires “no medical exam”, then it’s going to be more expensive in order to cover everyone. If you don’t smoke and are in average or above-average health, then you should simply apply for insurance that does require a medical exam. Now, if you are in poor health, then this might be an opportunity to get some insurance that otherwise might not be available to you. But remember that there are also a few no-medical-exam term life insurance companies out there.

Mortgage Protection Life Insurance Is Hugely Profitable
In addition, simply since this product is marketed by fear (remember your homeless family!) and primarily through unsolicited mailings, it has a higher profit margin and thus higher cost than regular term life insurance. This is supported by this InsWeb article that states:

The National Association of Insurance Commissioners (NAIC) says that mortgage insurance lenders pay out only about 40 cents in benefits for every dollar consumers spend buying that type of policy, compared with 90 cents on the dollar paid out to consumers who hold regular term life policies.

60% profit vs. 10% profit! I wouldn’t even bother myself, but if you must, simply comparing quotes with an insurance comparison website like SelectQuote will provide you an easy answer as to which is a better deal.

Comments

  1. Mark Stanislav says:

    Haha! I received my first letter, less than a month after closing, on Friday. Straight to the trash. Your analysis is right on.

  2. Recently a Canadian tv network did a special on mortgage life insurance http://www.cbc.ca/marketplace/in_denial/

    Mortgage life insurance is underwritten ‘post-claim’. In other words you’re always approved because they determine whether you qualify AFTER you file a claim instead of before as is customary for life insurance. Not only is it better value to buy term life, but you are sure to get the payout because your insurability is determined at the time you apply for insurance.

  3. We bought our house last May and received tons of these offers, especially in the first 6 months or so. They’ve stopped lately, so that’s good.

    We’ve never really paid much attention to them, and just throw them away whenever we do get them. If insurance is a priority to protect against any possible life emergency it’s probably better to just increase the amount of money you’re putting towards your life insurance policy with your job (if offered) or otherwise.

  4. That and credit insurance and stuff don’t make sense to me. As you say, life insurance can cover it all without being limited to the mortgage. I’ve seen a number of good life insurance calculations and almost all include the mortgage (or part of it) anyway. :)

  5. Not all mortgage protections policies are guaranteed issue. But they are usually “simplified issue” – meaning no medical exam. If you are in good health you can sometimes get a better rate by getting a fully underwritten policy. It’s basically a marketing deal by the insurance companies – and a good one, since most people do need term life to protect their families. (Disclaimer: insurance agent) :)

  6. This is a tad off topic. I can’t offer you any advice about the mortgage insurance other than the fact that I didn’t see the worth of purchasing it myself. But, you did purchase title insurance, I hope?

  7. Think about what Mortgage Insurance really is, a insurance policy for the
    bank, and they get the consumer to pay for it.

    I totally agree with the idea of getting a term policy equal or greater than the mortgage amount. If something happens to me, my family has the flexibility to use the cash as they see fit.

    Great Blog, keep up the great work!!!

    • Doug Cornelsen says:

      As an agent who sells Mortgage Protection Insurance let me clarify that you buy Mortgage insurance to cover the house should you want to stay in it after your loved one passes away. However remember that this is term life insurance and it is payable to the owner of the policy, not the bank. That is where I had an issue with the blog. If you buy it from the bank, yes the bank wants to protect its interest and will make sure they are the beneficiary. Your responsibility is to augment your life insurance for you and not the bank. When the time comes and it always comes, you can choose to use it to pay off the mortgage or to pay off your bills. It is your term policy. I would never sell a policy to a family with enough life insurance to cover expenses and the house. Sadly, more people are insurance poor do to their lack of understanding what the needs are. You need a trusted agent to help you determine those needs. There is a lot of research out there that will help you identify the needs. Also, get an independent agent that is not locked into one insurance company. They have your interest in mind, not the insurance company.

  8. Jon

    I think you should write an article on the discussion of a Home Warranty and maybe how long you should keep paying on one.

  9. Without having read the blog (just read the title), the answer is “No”. But you should have life insurance.

  10. My Remedy: Send the envelopes back EMPTY and stick it to them so they get smacked with the postage fees. HA!

  11. Julie Fuller says:

    (‘m a longtime lurker, never commented though!) It’s worth noting that even though there is no medical exam, and some of the flyers make it sound like there’s only like three medical questions (which you fill out and send back in), they’ll call on the phone and ask loads of personal questions about your medical history, and if there’s anything in it, you’re basically out of luck. I was hoping to be able to sign up for it when we bought our house–I was about eight months out from a cancer diagnosis, so it seemed like a good investment since I can’t get life insurance–but no luck.

    Also, some of them are especially scammy, in that they give your contact info to multiple businesses and then they each call you for the next 12 months. :-)

  12. Vick Bender says:

    I responded to a flier and met with the insurance agent for a mortgage credit life product I am confused. What I did like about the offer was that it protected me if I lost my job for 9 months and my wife doesn’t work. It would give me 9 months of payment and the monthly premium is not bad. The insurance company is a double AA rated public company. There doesn’t seem to be much information on the internet about type of coverage and wanted to see if anyone knew of anyone else I could get quotes from to compare rates. Also, if there were any simple Term Life policies out there that might be less expensive but would cover me if I lost my job. I don’t want to have to die in order to use my life policy, or worse yet get critically disabled/sick to use the disability from my job. What if I lose my job?
    If anyone with REAL information on this, please respond

  13. Lady Bug says:

    Hello everyone,
    You all have valid points. I currently work for a life and supplemental health benefits company and they have been around for over 100 yrs. Our company provides Mortgage Term Life Insurance and yes after a certain amount you do have to either do an oral swab, medical exam, or be in somewhat of good health or perfect health. Companies that do offer term insurance without medical exams are more expensive and the payout is definitely different. As far as being able to take care of bills, etc. after the mortgage has been paid off if someone dies, you would need to get a monthly income plan that would pay out a certain amount a month to the surviving spouse, or beneficiary. You can also specifiy a certain amount that you want to be paid as a lump sum. As for Mrs. Fuller, only maybe a handful of companies can cover you, but the only thing is they will only cover you for a certain amount. I know our company has a policy that covers all major medical diseases except AIDS. Depending on what state you live in, if you are interested I can lead you in the right direction. I must add, because it is a major medical condition it is going to be a little bit higher than your normal policy, but it will give you some coverage that other companies wont.

  14. Mortgage Protection Life Insurance is great depending on your situation. You can insure for more than your mortgage. If you insured for 150k and your spouse dies years later when your mortgage is 30k than you have 120k to do what you will. You may have group insurance through your job but thats only as long as you stay with that employer. MPLI may not be for everyone but its a great safety net when needed.

  15. LP in Ohio says:

    There are numerous riders that can be attached to mortgage protection insurance to cover your specific needs and some cost as little as $1 more in premium. Riders range from accidental death, critical illness or disability, to unemployment and others, so the benefits are up to you and DO NOT have to be specific to just the mortgage.

    If you secure $100,000 in mortgage protection, that is what the beneficiary will receive, even if the mortgage has been paid down to $10,000. The benefits are NOT reduced and the payout is fixed. If there is still a $100,000 remaining on the mortgage, the beneficiary does not have to pay off the entire amount, or any of the amount for that matter. They could use $50,000 to apply toward the mortgage and refinance for lower more manageable payments and use the other $50,000 to pay off credit cards, vehicles, or just put the money in the bank. There is no requirement or restriction for how the money is used.

    Additionally, there is an option for a return of premium rider where you can receive all the money paid into the insurance back in one lump sum and tax free. So it’s there if you need it and you get your money back if you don’t. The return of premium can be used to pay the house off early if the insurance is taken out for less time than the amount of time remaining on the mortgage.

    MPPI (Mortgage Payment Protection Insurance) or MPI (Mortgage Protection Insurance), which are used interchangeably should not be confused with PMI (Private Mortgage Insurance), which is required by lenders if the down payment on home is below a certain percentage of the purchase price. MPPI and MPI are to protect you and yours with benefits mentioned above. PMI, although you pay for it in your mortgage, is to protect the lender. So if there is a default on the mortgage, the lender will receive benefits, you will not and the debt is still yours as defined in your agreement with the lender.

    MPPI can encompass many needs and puts an affordable plan in place well beyond a simple life insurance policy, which makes it a smart decision.

  16. Your analysis is correct. Mortgage life insurance is NOT a good deal. First, if you have anyone who depends on you financially, then you need life insurance to help them maintain their standard of living…not just remain in their house. Also, keep in mind with Mortgage Life Insurance it actually gets more expensive as the years go by. After 20 years, you’ve already paid down your loan. However, you’re still going to be paying the same price for the insurance coverage…even though the payout will be what you currently owe on your house.

  17. The best mortgage protection is term life insurance and that is what many “mortgage protection” agents sell through their isurance carriers.

  18. “Mortgage protection” is only a term used for life insurance that refers to term insurance any way. It is true that when you obtain a new mortgage that you can obtain a term policy up to $250,000 WITHOUT a medical exam, usually up to 13 months from the loan inception, & yes the premiums will be higher. Most companies offer a non med product for policies of $99,999 or less. You could always go with the non med product first, & after that is in place, apply for a medical policy to get the lower rates,( with another carrier of course ).Some times they find medical problems you didn’t know you had & rate you up higher than the non med was. You could just decline the coverage at that point, because you are already covered. As stated earlier by LP, you have many options. ALWAYS get the level death benefit. the beneficiciary is always determined by you. I would never set up the lender as the beneficiary. Life insurance is a must have.Don’t leave your loved ones without the protection that they need. Its hard enough on them for you to be gone,do you want them to be saddled with your bills too?

  19. Keir McCutcheon says:

    First off dont get mortgage protection insurance confused with PMI or “Private Mortgage Insurance” because they are not the same. Mortgage Protection Insurance is designed to payoff you home in the even of death. Unlike PMI the death benefit and premiums are level and will never change. So as you pay down your mortgage your death benefit will not decrease with it. Mortgage protection is not something you should buy in place of life inusurance it is something that is in addition to any life insurance policy you may already have. You do not want your family using your life insurance policy to payoff the mortgage. They should use that money to continue the lifestyle you have worked you whole life to provide them with and allow them to carry on as if you where still there. The mortgage protection will pay off you home and now you family can use the life insurance money for the things that really matter.

  20. I would highly recommend that people strongly consider mortgage protection. I disagree with many of the negative comments above. Unless you’ve been through the experience and actually had to use it, I don’t think you really can have a proper judgment. I understand that most companies are banks and do offer bad deals to home owners, but make sure you are dealing with an insurance company and not a bank. You will not get ripped off. I say this because I actually replied to one of these offers. I was told by friends and family to watch out, but decided to talk to the company anyways. The rep that called me was extremely nice and I felt very comfortable with her. She didn’t try and talk me into the ROP or any other features for that matter. I decided to take the chance and I’m glad I did because 8 months later, I had to use it unfortunately. My husband had life insurance through his company in an amount of $160,000. This did come in handy, but our mortgage is way more than $160,000. Plus I had to pay for a funeral, pay off credit card bills and other things like live my normal life. The mortgage policy took care of my house and my husbands life insurance took care of everything else and I was able to take some time off from work and not worry about getting another job to replace his income. I was able to get a 10 or 20 year term and the price was pretty similar to normal term life insurance companies. It was slightly higher (about $6 or $7 bucks more)but term insurance companies didn’t offer anything but insurance. I received a bunch of great features that were included in the price and adding those features to a regular term policy ended up costing more. I talked all of my friends and family into getting this coverage as well because a few of them have lost their jobs earlier this year and lost any life insurance they had. The company gave me the check too. I didn’t have to use it towards my mortgage, but I did because that’s the reason I purchased it. I would recommend everyone to check out the company first and make sure they aren’t what is described as in this article but consider it.

  21. The inurance company will invest your premiums and make lots of money? Imagine that. Thats the insurance business. First of all, most people won’t take that money and save it themselves, lots of statistics on that, and secondly, the amount saved would never add up to nearly the amount paid if someone dies. There are mortgage protection plans that do not decrease over time as well. There is nothing wrong with either plan as long as the prospect understands the policy.

  22. Hmm… seems like CNN Money would agree with me. People should buy the coverage that is the cheapest and offers the most flexibility.

  23. Most people already have some type of life insurance in place at an early age. As we go through life, most of us incur more debt, either because we have to have something that we cannot afford, or through unforeseen circumstances that force us to borrow. Often times, it is due to a large purchase, a home for instance. At that point, the original life insurance policy taken out earlier in life will usually not be enough to cover your new higher total debt load you now have. Yes, You should buy the coverage that is the best value. As far as flexibility, YOU are the one who decides the beneficiary, ( who gets the money ), no one else. At this point, you should either Increase your current life insurance policy, or take out a separate Mortgage protection policy, (again, YOU decide who gets that money, no one else) to enable your loved ones to have the freedom to spend it AS THEY SEE FIT. The bottom line is you want them to be protected & be able to maintain their current life style. The term “Mortgage Protection” is really just a fancy way of saying, extra life insurance for the extra debt you just picked up.

  24. I’m actually considering Mortgage Protection just because of my company may have layoffs and the policy I’ve seen says it covers my payment during the time I am unemployed.

    What do you think I should do?

  25. Get it in place before you are laid off, especially if you are still healthy. Make sure that the policy doesn’t have a waiting period. before it will start making the payments. In other words make sure that if you had a policy that takes effect the first of next month, & you lost your job say 2 weeks later, be sure that it will actually start making the payments for you. Typically the policies I have seen, will have you to make the first payment, after the layoff,then they will pick it up, but usually only for a specified period of time. Be sure to understand all the requirements, & restrictions.

  26. Ok I actually sell mortgage insurance, and I’ve read some of the comments, but your not entirely right! First off it’s called Mortgage insurance cause yes technically it is based off your mortgage. But if you sign up say for a $100,00 policy, that amount doesnt shrink just because your mortgage does. Secondly the companies I sell for never cut checks to the mortgage company to pay off the mortgage in case of a death. Those checks are given to the beneficiary in the time of Death to do what with ever they feel. I know because I delivered some of them myself personally. There’s no law stating that the person has to pay off the mortgage.
    On top of that it gives the person an opportunity to get a policy without having to take a physical. It you are turned down with someone else because of a physical, watch how high your rates will be. Through the roof!!

  27. I disagree with your advice on buying a large term policy for these reasons.

    Once the term policy has expired I would have to qualify again and I may not qualify.
    Most people are not good savers the return of premium is an excellent forced savings account.

  28. I would like to know if there is a mortgage protection plan that will do exactly what it says. You pay the premiums and when you die the house will be PAID OFF. This is what people are lead to believe until they talk to the insurance rep. Then it is how old are you do you have any pre existing, do you smoke. By the time it is all said and done, you have insurance but when it’s time to pay up the beneficiary doesn’t have enough to even come close to paying off the mortgage.

  29. Sensible Knowledge says:

    I have read a lot about this insurance protection. What about mortgage protection where the homeowner chooses the beneficiary (not automatically the bank), the amount can be for more than the mortgage amount with reason, there is the option of adding disability insurance on top of that to help pay mortgage payments on disability, the premium never changes AND the face amount of the policy DOES NOT decrease. Is this a good value for the product?

  30. No one here has addressed coverage if you loss your job.

    Life insurance only covers when you die.

  31. mortgage protection insurance is not tied to your loan what so ever. simply put, if you take out a 15, 20, or 30 year loan, it would be wise and responsible to take out a term life insurance policy for the life of the loan. To answer Ricks question some insurance companies will cover your insurance premiums for up to two years if you become unemployed at no extra cost

  32. You’ll want to make sure if you purchase mortgage protection insurance that the policy gets paid to the beneficiary instead of the mortgage company. That way the individual can use the income for other expenses as well including groceries, cars, maintenance and other stuff.

  33. I have read a few feed-back regarding MPI, and some of you have really been mislead. There is no company that is going to pay you if you are laid off and out of work. If that were the case everyone would have one of these policies. If you become disabled they will waive premium payments for a short period of time, normally after 3 months of being out of work. The plan itself is a good plan to have and I have witnessed were it does pay off in the case of death. Some of you have a grasp on what the plan is designed to do, and that is to protect the family in case of premature death of the homeowner and bread winner.

  34. I also would like recommendations on protection for job loss. Can someone please answer us? I receive the offers in the mail, with no name of the Co or any way to contact except to fill out the form and mail it to them. I’m going to be layed off in a few months, due to outsourcing. I work for a majory healthplan and they are outsourcing nurse positions.. but don’t get me started on that. Thank you for your advice in advance

  35. 60% profit vs. 10% profit!

    Does the writer read? $.40 was paid out on each dollar of POLICIES versus 90% paid to consumers ( meaning they could have paid for 10 different policies that did not pay, but the 11th did and they are part of the 90%)

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