The euphoria of buying a new home can sometimes mask the financial risks of home ownership that any borrower should carefully consider. If you lose your job, become disabled to the point that you cannot work or die before your mortgage is paid off, mortgage protection insurance will pay your mortgage. This type of insurance protects one of your largest assets for your spouse and children.
Mortgage protection insurance, or MPI, and private mortgage insurance, or PMI, are easily confused by borrowers. You're generally required to get private mortgage insurance if you put less than 20 percent down on your loan. This assures the lender that the loan will be repaid if you default on your mortgage. Mortgage protection insurance, meanwhile, ensures that your mortgage will be paid if you lose a substantial part of your income.
Benefits and Costs
One big benefit of mortgage protection insurance is that it is issued on a guaranteed-acceptance basis. During the application process, you'll be asked very few questions that could keep you from getting coverage. Even if you have a chronic health condition or work in a high-risk occupation such as mining, chances are you'll be approved. But the cost of this insurance is based on how much risk you represent. If you're an elderly buyer with a 30-year mortgage or are in a professional field with a lot of recent layoffs, you'll pay a higher premium. Generally, rates are similar to what you would pay for life insurance.
How to Buy
The easiest way to get MPI is to get it rolled into your term or whole-life insurance policy. This is also the easiest way to qualify, and you'll only have one monthly or quarterly bill. You can also buy MPI from life insurance companies without having a term or whole-life policy.
Just as you shopped for homeowners and car insurance, you should compare several insurance companies to make sure you are getting the best coverage available for the price. Some companies will charge premiums that are higher at the outset, then charge less as your mortgage balance decreases over time. Others will offer the same premium throughout the life of the policy, with the premium amount averaged out over the policy term.
Some insurance products build cash value over time and can be viewed as investments. Mortgage protection insurance is not among them. Just because you have life insurance, MPI and other forms of insurance doesn't mean you're prepared for all potential calamities. Financial planners say the best way to prepare for the future is through a regular savings and investment plan in which your investments can earn interest and appreciate over time.