When you buy mortgage protection insurance, you’re paying for the promise that your mortgage will be paid off if you pass away. While that sounds good, money expert Clark Howard calls mortgage protection insurance, “one of the worst rip-off products that the banks have dreamt up.”
Keep reading to see what Clark recommends instead and for answers to common questions about mortgage protection insurance, including:
- What Is Mortgage Protection Insurance?
- How Much Does Mortgage Protection Insurance Cost?
- How Does Mortgage Protection Insurance Work?
- What Does Clark Howard Think About Mortgage Protection Insurance?
- What’s the Difference Between Mortgage Protection Insurance and Mortgage Insurance?
What Is Mortgage Protection Insurance?
Mortgage protection insurance is known by several names in the insurance industry. It’s often abbreviated as MPI and it’s also called mortgage life insurance. You may have even heard it called “croak-and-choke” insurance. That’s because — put simply — mortgage protection insurance is intended to pay off your home loan if you pass away.
How Much Does Mortgage Protection Insurance Cost?
Like other types of insurance, the cost for mortgage protection insurance depends on several factors. Your insurer, where you live, how much you owe on your mortgage, your age, and even your gender all play a role in your rate.
The more coverage you need, the higher your rate will be. And as a rule, you should expect a higher rate the older you are when purchasing a policy. According to Seniors Mutual, an independent insurance agency, the following monthly cost estimates are, “preferred plus (best rates available) for a male of various ages and coverage amounts,”:
You can review the data from Seniors Mutual here, which I’ve included for informational purposes only and not as an endorsement of the company. I reviewed pricing data from a few other sources online and found rates to be within a comparable range. Compared to other types of insurance, I found it more difficult to get clear price quotes and general pricing information for mortgage protection insurance.
How Does Mortgage Protection Insurance Work?
Mortgage protection insurance kicks in when a policyholder passes away. So, if you have mortgage protection insurance at the time of your passing, your policy will pay off the covered balance of your home loan.
What’s important to know is any payment from the insurance company will not go to your family or beneficiaries. The insurance company will pay your lender directly.
What Does Clark Howard Think About Mortgage Protection Insurance?
The promise of mortgage protection insurance sounds good, so why isn’t Clark a fan? First, you’re paying to protect your lender, not your beneficiaries.
“With the mortgage life insurance, all it does is it helps the mortgage company directly — and your survivors indirectly — by paying off the mortgage. But [mortgage life insurance] removes the flexibility.”
“Normally with life insurance, you name your survivors that you want to be taken care of as the beneficiary. Your survivor may or may not find that it’s a good idea to pay off the mortgage. There may be other priorities,” Clark explains. He recommends term life insurance as the better option for financial protection in the event of your passing.
“As long as you can medically underwrite for your own term life insurance policy…buy your own policy to provide for the needs of your survivors,” he says. You can read more about what term life insurance is and how to shop for term life insurance here. Unlike mortgage protection insurance, term life insurance gives your family the flexibility to choose how to use the policy’s payout.
The second reason Clark isn’t a fan of mortgage protection insurance is because of the high costs for coverage.
Since mortgage protection insurance policies don’t require medical underwriting, insurers are taking on greater risks. To compensate, premiums for mortgage protection insurance will generally be higher than those for term life insurance. But while medical underwriting can lead to lower premiums for term life insurance, it also means that not everyone will qualify.
If you are denied term life insurance because of the required medical underwriting, however, Clark says this is one exception when you may want to consider mortgage protection insurance. “The person who will inherit the house will benefit from having no mortgage based on your overall financial situation,” he says.
What’s the Difference Between Mortgage Protection Insurance and Mortgage Insurance?
Also known as MPI, mortgage protection insurance can easily be confused with private mortgage insurance – or PMI. Let’s see how the two compare.
Mortgage Protection Insurance vs. Private Mortgage Insurance
| Mortgage Protection Insurance | Private Mortgage Insurance |
| – also called “MPI” and “mortgage life insurance” – pays your mortgage lender in the event of your passing – offers protection for your family; your lender receives payout and your heirs can keep your property – optional | – also called “PMI” and “mortgage insurance” – pays your mortgage lender in the event that you stop making payments on your loan – offers no protection to you/your family; your home can still go into foreclosure – may be required by your lender (typically required when less than 20% is put down on a home purchase) |
Mortgage Protection Insurance vs. Term Life Insurance
Term life insurance isn’t similar to mortgage life insurance in name. But since we’ve covered a bit about term life above, let’s also see how it compares to mortgage protection insurance at a glance.
| Mortgage Protection Insurance | Term Life Insurance |
| – pays your mortgage lender in the event of your passing – gives your family no flexibility on how to spend payout (only the mortgage is paid) – guaranteed approval; does not require medical underwriting – typically more expensive | – pays your chosen beneficiaries in the event of your passing – gives your family flexibility to spend payout however they see fit (including for mortgage, funeral expenses, bills, etc.) – not guaranteed to qualify; requires medical underwriting – typically less expensive |
Final Thoughts
Mortgage protection insurance sounds like a great way to make sure your mortgage is paid off if you pass away unexpectedly. But there are some drawbacks.
First, the beneficiary of a mortgage protection insurance policy will be your lender. In the event of your passing, your insurer will send any payout directly to them. This means your family won’t see any money. And there’s no flexibility for your family to decide how to spend the funds if there are other pressing expenses.
Second, mortgage protection insurance is more expensive than other types of life insurance. You can read more about other types of life insurance, including term life insurance vs. whole life insurance here. If you can medically underwrite for term life insurance, Clark recommends you go with that for better rates and better flexibility for your family. But if you cannot qualify for term life insurance, mortgage protection insurance might be worth considering.
