Buying a home is a major financial commitment. Depending on the loan you choose, you might be signing up for 30 years of payments. But what will happen to your home if you suddenly die or become too disabled to work?
Mortgage protection insurance (MPI) can help your family cover your mortgage under certain circumstances – you can avoid foreclosure if you can no longer work to pay your mortgage.
Let’s take a closer look at what MPI is, what it covers and who might need a policy.
Mortgage protection term insurance is a type of life insurance policy specifically designed to help protect your mortgage in the event of your death. It provides coverage for a specified term, typically matching the length of your mortgage loan, which is normally 10, 20, or 30 years in length.
The purpose of mortgage protection term insurance is to ensure that your loved ones can continue to make mortgage payments and stay in their home if you pass away during the term of the policy.
If you were to die, the insurance company would pay out a death benefit to your beneficiaries, which can be used to pay off or cover the outstanding mortgage balance.
A mortgage can be paid off sooner as well with a return of premium term policy in place. We'll explain more about that in just a few.*
Mortgage Protection Term Insurance can be beneficial for individuals or families who have taken out a mortgage loan to buy a property. It provides financial protection by helping to pay off or reduce the outstanding mortgage balance in the event of the policyholder's death.
This can be especially important for those who have dependents or co-owners who would be liable for the mortgage debt if the policyholder were to pass away. It ensures that loved ones are not burdened with mortgage payments they may struggle to afford.
Additionally, if the policy includes disability or critical illness benefits, it can also provide income replacement or coverage for medical expenses if the policyholder becomes disabled or critically ill and is unable to work.
Ultimately, individuals who want to safeguard their family's financial security and ensure the future of their home would be ideal candidates for mortgage protection term insurance.
If it sounds as if we are biased when it comes to Term insurance versus other types of insurance it's because we are. More specifically in regard to mortgage protection insurance we tend to direct our clients to invest in a return of premium option if we determine, after evaluating their finances that they can afford to pay a little extra to get all of their hard earned money back when the term ends.
It's important to note that return of premium functionality is only available with term life insurance, which is usually less expensive than the other main type of life insurance, called permanent or whole life insurance.
Also regular term policies feature only a death benefit that pays out if you pass away before the term is over. Whereas if you have a return of premium rider on your policy, or if return of premium functionality is built into the policy, when the term is over, you will receive a payment from the insurer that is not a death benefit, but which typically includes some or all of the premiums you have paid into the policy.
Did we mention this return is all tax free?*
Based on a $250,000, 30-year term life policy. Let’s say a 25-year-old woman in excellent health pays $19.90 per month for this policy without the return of premium feature. If a return of premium rider is added to her policy, then her monthly premium climbs to $51.77 per month. But if she outlives the term, then she could receive the entire $18,637.20 back that she paid over the past 30 years.
This money could then be used however she sees fit. For example the extra money could be added to her retirement funds, or used to pay off her mortgage a few years earlier.
Determining the value of a return of premium life insurance policy is largely based on your individual financial situation and goals. While some might not need a return of premium life insurance policy, it definitely can be beneficial to those who wish to pay less in premiums each month vs the higher premiums of permanent whole life insurance.
A return of premium life insurance policy could be a great option for someone who can afford to pay a little extra each month to guarantee that they’ll have some savings.
For example, receiving a large sum of money back at the end of your life insurance policy’s term may be helpful when you are heading toward retirement — especially since the sum is tax-free.
But it’s important to understand that you’re not gaining additional or new money. Instead, you’re getting back money that was yours to begin with.
So while return of premium life insurance can be a nice saving option if you’re looking to set aside some money for retirement or have a guarantee of getting money back, there may be other savings options that could give you a greater return. Unfortunately you'll often have to pay much more upfront to take advantage of these alternative options.