Mortgage Protection Insurance- What It Is and What It Covers

What if you lost your job and couldn’t make your mortgage payments? This can be especially dangerous if you have invested in a 30-year fixed-rate mortgage, because you would not be able to refinance or sell the house to get out of the debt unless you were able to pay off the entire loan at once (which may be impossible).

And even if you could do that, you would still need to find another place to live, which might require more money than you could afford to spend at once. Mortgage Protection Insurance– What It Is and What It Covers

Things To Consider When Choosing a Mortgage Protection Plan

Mortgage protection insurance is a form of life insurance. Before you purchase a policy, it’s important to consider what type of mortgage protection plan will work best for your needs.

There are many things to keep in mind when selecting a mortgage protection plan.

An immediate life insurance policy is one that begins paying a death benefit right away. On the other hand, term insurance will pay out if you die within a certain period of time.

Because it doesn’t start right away, term life insurance may be a better option for young adults whose mortgage debt isn’t significant or who don’t need a death benefit until they’re further along in their career or family.

Another difference between types of mortgage protection plans relates to how quickly your premiums are repaid.

Some plans offer lump sum payments at specified times, such as 25 years from when you first started making payments on your home loan.

Types of Plans

There are three basic types of mortgage protection insurance: Life Only, Life and Disability, and Life, Disability and Loan Reimbursement.

Life Only protects you from losing your home if you die or become disabled; some policies also provide loan forgiveness upon death or disability. With a life-and-disability policy, you’re covered in case of both death or disability.

In other words, your family won’t lose their home because of a catastrophic event. If you’re not able to make payments because of injury or illness, a loan reimbursement policy will repay your outstanding debt so that your family can continue living in their home without foreclosure proceedings.

Some policies will pay a lump sum if you die or become disabled. Others cover outstanding mortgage debt in case of death or disability, so your family won’t lose their home.

Some payback loans—but not all—offer some type of cash payout if you become disabled. Loan reimbursement plans are usually based on a sliding scale, with more money paid out for higher loan balances.

How Much Does It Cost?

Mortgage protection insurance costs anywhere from $10 to $50 per month, but rates differ depending on how much coverage you want.

So, what exactly does it cover? Mortgage protection insurance can help pay off your mortgage or loan if you become disabled, die or are diagnosed with a critical illness.

In some cases, it will also pay off any outstanding credit card debt you have to help keep your family out of financial trouble.

Before you decide to purchase mortgage protection insurance, however, it’s important to understand how much coverage you need.

Factors like your age, health status and current income should all be taken into account. Plus, if your mortgage balance is small compared to your home’s value—or if you own a paid-off house—you may not need as much coverage as someone who has large debt with high interest rates.

Don’t forget that a sudden illness or injury could leave you unable to work for months or even years, so it might be worth increasing your coverage level if your family’s budget can handle it.

That way, you won’t have to rely on loved ones for financial support in an emergency situation.

Are There Other Options?

While mortgage protection insurance is a good option for many, it’s important to consider other coverage types first.

If you have health or disability insurance, or are covered by your employer’s disability plan, then you may be able to avoid buying separate mortgage protection insurance.

Additionally, if you have a high credit score and a long history of on-time payments on other lines of credit, you might be able to obtain a personal loan that covers your home in case of an emergency—at potentially better rates than those offered by MPI providers.

Make sure to shop around when shopping for coverage options and get multiple quotes from different insurers before settling on one provider (unless they already offer the insurance through your work).

You should also take into account your home’s market value. If you live in an area with a high level of property crime, or near an area that has experienced floods or other natural disasters, then it might be worth paying extra for insurance to help protect against damages to your home.

How Do I Enroll?

There are two primary ways to buy mortgage protection insurance. You can enroll directly with an insurance company, or you can purchase it through your lender at closing.

If you enroll directly with an insurer, be sure to read all of your paperwork and shop around; not all mortgage protection policies are created equal, so make sure that you’re getting a good deal.

If you purchase your policy through your lender at closing, it’s usually one of many add-ons that they’ll try to sell (mortgage protection is particularly lucrative for lenders because they get a portion of every premium).

As with other add-ons, lenders have incentives to recommend their own products—it benefits them whether or not you enroll in their policy.

Related: How to Get Health Insurance in the USA – A Comprehensive Guide

Can My Lender Choose the Company?

Your lender will probably offer a few companies to choose from, but you have options. Even if your home loan company has a relationship with one insurance provider, you can still choose an alternative company as long as it’s licensed in your state.

Your mortgage servicer may also require that you maintain enough equity in your home to qualify for mortgage protection coverage—typically 20 percent or more of its appraised value.

However, different mortgage providers have varying requirements so be sure to check with yours before signing up for anything. At least one major provider requires 5 percent equity.

Your first step is to talk with your mortgage lender or servicer. You can find out how much equity you need in your home, what kind of exclusions they allow, and if there are any restrictions on which provider you use.

If you’re applying for mortgage protection coverage through your employer’s benefits package, contact HR to see what insurance provider(s) are available.

Otherwise, compare providers based on their experience, license availability, rates charged, reputation for customer service, claims processing times and more.

How Long Does It Take to Get Approved?

In most cases, you’ll receive a letter of acceptance within just a few days. But because so many factors go into your approval (including your credit history), it can take as long as 2 weeks for your insurance company to mail you a policy.

That means if you want to close on your home purchase within that timeframe, make sure you select a provider that offers expedited approvals.

And always make sure to check if providers charge additional fees for expedited service; it could add up to hundreds of dollars in costs.