Contributed article in our personal finance series. Enjoy! – Kimberly
Some homeowners worry about their properties when they die, so they are getting mortgage protection insurance. The promise is appealing and simple, and this is when the insured dies, the remaining mortgage in the house will be paid off, and the surviving family can keep it.
However, the reality is sometimes more complex than this promise. You can visit Low.ie to find out more information about life and mortgage protection insurance, so you’re better informed. Many people find that a normal term of life protection is already enough for their needs.
More about the Mortgage Protection
As the name implies, mortgage protection insurance will pay off the balance of your mortgage the moment you die. In-house developers or bands often sell these.
One of the reasons many lenders love these policies is simple. They get paid in full when the homeowner dies. In normal circumstances, the death benefit often goes to the beneficiaries of your choice. However, with this kind of policy, the lenders are often the beneficiaries.
This will benefit the entire family indirectly. For example, you might still owe $200,000 on your house, and the protection of your insurance will pay off all of the amounts in case of your demise. The property will be free from debt, and the family can keep it and stay inside for years. However, they have no say about how the money is going to be spent. As the balance of your loan decreases, the benefit that you’re going to get will be lower as well.
Is this a Requirement?
Know that mortgage protection insurance is not required, and this is not the package that private financiers and banks may sign you up for before getting a loan. You can get more info about mortgage insurance on this site: https://www.investopedia.com/terms/m/mortgage-insurance.asp. Here are some acronyms and terminologies to know to avoid mixing everything up:
- MPI – There’s mortgage protection insurance or a type of credit insurance. MPI will pay the lending institution instead of your loved ones, which you’re not necessarily required to buy.
- PMI – Private mortgage insurance is different from MPI. This is required for all borrowers to purchase if the down payment amount was less than 20%.
Do you Need this Insurance?
Know that there’s the inflexibility of the payout that may deter some from getting this. When you die, there are several options for the surviving members, and these are:
- Use the death benefit to pay off the home and keep any leftovers for their needs
- Choose to skip the payment for the house and use the money as they see fit in their current situation
The MPI may lock your loved ones into the mortgage payment even if there are needs and medical bills left that are more urgent.
Still, some people prefer these because they offer convenience. This lines up precisely with the balance on your home, and you won’t have to be required to go over a medical exam to qualify.
If you’ve been denied the whole life or term life insurance packages because of age or medical issues, the MPI can be your second-best option. This will protect your home in the long run in case something happens to you.
For people with a bigger budget, an MPI is a kind of supplement for their term life. They will get the mortgage paid off as additional security, and the entire family can live inside the house and use the money from the term life and spend it on their needs.
Advantages
If your family is still relatively young and needs a haven, you can reduce the burden on your spouse and make sure that the house will be paid in full in case something happens to you. This is applicable at the start of your loan when you’re still new into married life, and you want the extra security and peace of mind that comes with having multiple insurance coverages.
However, it’s also essential to remember that a term life may give you the same benefits and payout. They will match your policy length and coverage amount in the mortgage. Picking a coverage amount and factoring in your other responsibilities like annual income protection could be worth it.
As mentioned, you don’t necessarily have to undergo a medical exam, and there are no questions about your health when it comes to an MPI. This is an excellent alternative and vehicle, especially if you have a medical condition that will increase the premiums in a term life insurance package.
In many cases, the insurers will allow you to add riders to the MPI policy, like the return of premiums. This rider will return the tips you have paid for after a specific number of months. When the individual is still alive at the end of the policy period, the money is returned tax-free.
This is a feature that’s often added to the rider. If the policy is canceled or the individual stopped paying, there will be no returns depending on the plan you’ve signed up for. Minimum coverage may be required, like buying $100,000. There’s always a chance to take withdrawals or loans against the cash value, but this will reduce the mortgage payment amount when you die.
Why You Shouldn’t Buy MPI
There are pros and cons when it comes to MPI. Some of the drawbacks to know about are the following:
- Not Enough Flexibility. While the family can benefit from not paying the mortgage any longer, they may still have debts to pay and other expenses they can’t afford. With the standard policies, the family can pay out the most pressing medical bills and use the extra for college tuition.
It’s Declining in Nature. Even if the premiums are the same every month, you’ll discover that the payout will also decrease as you continuously pay off the mortgage for your home. The premiums are often higher as well as what you’re paying in term life.
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