What is a Mortgage Protection?

Also abbreviated as MPI, Mortgage Protection Insurance is a type of insurance product that works almost similar to other conventional policies, only that it is meant for a mortgage payment. Such that, it is created to help pay off a mortgage in the event of the death of the policyholder. 

Depending on how big your mortgage is, you buy a policy with enough protection for the loan, then pay premiums until the policy ends. The policy benefits are only paid out to the beneficiary when you die during the term. 

What’s Unique About Mortgage Protection?

While mortgage protection works similarly to conventional insurance policies, there are a few differences that make MPI unique as shown below.  

Beneficiary

For other insurance products, the beneficiary of the policy is usually chosen by the policyholder and oftentimes is usually their loved one. With mortgage protection, the beneficiary of the policy is usually the mortgage company or the lender. In this case, the death benefit is not paid out to the family of the policyholder if they die, instead, it goes into paying off the remaining mortgage balance. 

Decreasing Death Benefit

Another key difference in mortgage protection is that the death benefit decreases with time. After the first five years of the policy, the death benefit amount starts decreasing so as to match the mortgage balance. It only makes sense that way because the policy benefits are meant only for the mortgage payment. The decreasing aspect of the death benefits ensures that the mortgage company only receives what it requires for the remaining required balance. 

Fixed Term Lengths

With mortgage protection, the term lengths are not flexible, and they are not customizable. That means that you can not also choose whatever term length you desire since the policy will be locked depending on the term of the loan. So, if it is a 10-year mortgage, then the term length of the mortgage protection will be locked to 10 years. This term length might also be influenced by how old you are such that it cannot exceed a certain length if you fall under a certain age bracket. 

Types of Mortgage Protection

If you are looking to purchase mortgage protection insurance, then there are a couple of options to choose from. Below are the different types of mortgage protection to consider. 

Reducing Term Cover

As mentioned, one of the characteristics of mortgage protection is that it has a reducing term. This is usually offered as a form of mortgage protection cover, and as the name suggests the policy amount covered reduces to match the mortgage balance. When the mortgage is completely paid off, the policy ends. An advantage of the reducing term cover is that it is the cheapest of all the types of mortgage protection policies. 

Level Term Policy

Just like the name suggests, this policy has constant premium payments and coverage. So, unlike the reducing term cover, you get the same amount of coverage for the premiums you pay. When you die before the term of the policy ends, the initial coverage amount is paid off to cover the remaining mortgage amount while the rest of the policy benefits go to your estate. 

Serious Illness

Good health is not always guaranteed, the same way you can’t be sure of when you die. As such, some people opt to include a serious illness to their mortgage protection. So, when you choose protection with coverage for serious illness, the policy benefits will also be paid out if you are diagnosed with a serious illness. However, this serious illness should be covered by the policy, and on the downside, this type of policy is usually expensive. Note that this does not mean that the policy doesn’t payout when you die before the end of the term because it does.  

Life Insurance Policy

Instead of purchasing a mortgage policy, you can instead use your life insurance policy, if you already have one. But you cannot use your existing life insurance policy if it has not been assigned to cover another mortgage or loan. Also, it might not work if your existing life insurance policy does not provide enough coverage. When you use your life insurance policy, the remaining benefits will still go to your beneficiaries, as long as the mortgage has been fully paid.