Mortgage Protection Insurance vs. Life Insurance: What’s the Difference?

What Is Mortgage Protection Insurance?

Mortgage protection insurance, also known as mortgage life insurance, is a form of credit insurance that can pay off your home loan if you pass away before moving, selling the home or paying off the mortgage balance.

MPI is an optional insurance coverage that can allow your family to remain in the home after you die. Coverage lasts as long as you maintain the mortgage loan and pay your monthly premiums.

What Is Life Insurance?

Standard life insurance provides a death benefit to your chosen beneficiaries if you pass away during your policy's term.

• Term life insurance offers coverage for a predetermined term that can be anywhere from one to 40 years.
• Permanent insurance, which includes whole and universal life, offers lifetime coverage as long as you keep up with premiums. With permanent insurance coverage, you typically also get a cash value component, which is like a savings account that grows over time.

Life insurance payouts are typically distributed as a lump sum to beneficiaries as determined by the policyholder's coverage amount.

Mortgage Protection Insurance vs. Life Insurance: What's the Difference?

While MPI and traditional life insurance can both offer financial protection in the event of your death, they differ in a variety of ways, including eligibility, cost, customization and flexibility for your loved ones. Here's what to know about how each option works.

Eligibility

• Mortgage protection insurance: Most MPI policies have minimal requirements to buy a policy. The only major stipulation is that you must be a homeowner who has recently closed on your mortgage loan. While most MPI providers require you to be within two years of closing on your loan, others may extend that timeline to five years.
• Life insurance: Eligibility for coverage may be based on a number of factors, including your age, health, lifestyle and more. Some policies have stricter approval criteria than others.

Cost

• Mortgage protection insurance: The cost of MPI will vary depending on your age, gender and the amount of coverage you need—in other words, your mortgage loan balance. In some instances, it may also depend on your health situation. For the same amount of coverage, MPI tends to be more expensive than standard term life insurance. However, for people with major health conditions, an MPI policy may be the only option.
• Life insurance: The cost of a standard life insurance policy will vary depending on the type of policy you choose, the coverage amount, your age and gender, your lifestyle and your health. On average, a term life insurance policy is cheaper than MPI for the same amount of coverage. With permanent insurance, however, a policy may be much more expensive due to lifetime coverage and the cash value component.

Beneficiaries

• Mortgage protection insurance: Because the only purpose of an MPI policy is to pay off your mortgage loan, the beneficiary is the lender by default.
• Life insurance: With a standard life insurance policy, you can choose your beneficiary. Typical beneficiaries include a spouse, children or other family members, but you may also name your estate, a trust or even a charitable organization as the recipient of your death benefit. You can even name secondary or contingent beneficiaries in the event that the primary beneficiary dies before or at the same time as you.

Coverage Amount

• Mortgage protection insurance: The coverage amount on an MPI policy is the balance on your mortgage loan. As a result, the death benefit decreases over time as you pay down your balance, even as your premium stays the same.
• Life insurance: You can choose how much coverage you want with a traditional life insurance policy, though you may be limited based on your health situation and budget. Term life insurance typically starts at $100,000, but permanent life policies can go as low as $10,000 or even less in some cases.

Payout Use

• Mortgage protection insurance: The only purpose of mortgage protection insurance is to pay off your mortgage loan. As a result, your loved ones won't have any access to the policy proceeds. That said, they may choose to sell the home and use the proceeds for other purposes.
• Life insurance: As the beneficiary of a life insurance policy, you can typically use the proceeds for just about anything you want. This may include paying off a mortgage loan, but you may also choose to pay off other debts, cover end-of-life expenses, save for college tuition or retirement or even replace the deceased's income.

Policy Term

• Mortgage protection insurance: Your MPI policy will end when you pay off your mortgage loan. This can occur if you pay off the loan and stay in the home, sell the home or even refinance your mortgage.
• Life insurance: The term on a life insurance policy can vary depending on the type of coverage you buy. With term insurance, term options can range from one to 40 years. With permanent insurance, you can get lifetime coverage.

Medical Exam

• Mortgage protection insurance: MPI providers typically don't require a medical exam, though you may need to answer some health questions, which can influence your rate. Even so, MPI may be beneficial for someone who can't qualify for traditional life insurance due to a medical condition.
• Life insurance: Not all forms of standard life insurance require a medical exam, though no-exam policies typically cost more and offer lower coverage amounts. If you want more coverage for less, you'll typically need to undergo a medical exam.

Should You Get Mortgage Protection Insurance or Life Insurance?

MPI may make sense under the following circumstances:

• You don't qualify for traditional life insurance. If you have a serious medical condition that disqualifies you from life insurance coverage, an MPI policy may be your only option.
• You're primarily concerned about your mortgage. If paying off your mortgage loan is the top priority upon your death, MPI may be worth it if a cheaper life insurance policy isn't available.

On the other hand, here are situations where it can make more sense to opt for life insurance:

• You want financial flexibility for your family. Traditional life insurance gives your beneficiaries a choice on how they use the death benefit.
• You want more value for your money. You can typically get more coverage for cheaper compared to MPI, especially if you're in stellar health.
• You want control over beneficiaries and payout. You'll be able to choose your policy beneficiaries and, in some cases, even how the proceeds are paid out.

Can You Have Mortgage Protection Insurance and Life Insurance?

Yes, it's possible to hold both MPI and traditional life insurance. This option may even be worth considering for someone who wants mortgage protection and broader financial peace of mind for their families.

For example, maybe you took out a life insurance policy years ago, but your health has declined since then, so increasing your coverage isn't an option. In this instance, adding an MPI policy can increase your total coverage to account for the mortgage loan.

How to Get Mortgage Protection Insurance

If you're thinking about getting MPI for your home loan, here are some steps you can take to obtain coverage:

1. Review Your Mortgage Details

Take a look at your mortgage loan information and what it would take to pay off the debt. Then, compare that to your current assets and other life insurance coverage that may be available to pay down the debt.

2. Compare Providers and Policies

After closing on your mortgage loan, you may be inundated with mail, phone and email offers from MPI providers. Take your time to shop around and compare providers based on their rates and other features they may offer.

3. Get a Quote

To get a quote, you'll typically need to share your name, date of birth, gender, ZIP code, contact information and your desired coverage amount and term length.

4. Submit Your Application

After comparing quotes, you can move forward and complete an application with your chosen provider. At this point, you may need to answer some additional questions about your health to get a final quote.

5. Get Approved

Once the insurer underwrites your application, it'll give you a final offer. Review the policy documents carefully to understand what the policy does and doesn't cover. If you want to move forward, sign the documents and provide your payment information to initiate the policy.

How to Get Life Insurance

If you've decided to purchase a traditional life insurance policy, here are some steps you can take to get the coverage you need:

1. Determine Your Coverage Needs

You may opt to use a rule of thumb, such as 10 times your annual income, or you may take a needs-based approach. With the latter option, you'll look at the actual expenses your loved ones may incur upon your death and purchase sufficient coverage to meet them.

2. Choose a Policy

Research the different types of life insurance to determine the best fit for you. Then, shop around and compare quotes from multiple insurers to make sure you get the best possible deal.

As with MPI, you'll generally need to provide some personal information to obtain a quote.

Tip: Term life policies are the cheapest option, but have no cash value and don't last forever. Permanent life insurance lasts your whole life and builds cash value, but costs six to 10 times as much as term life. Compare policies to see which works best for you.

3. Submit Your Application

Once you decide on an insurance provider, move forward with an official application. At this point, you'll generally need to provide your age, weight, height, date of birth, health conditions, a detailed family medical history and information about your lifestyle.

You'll also name your beneficiaries in your application, though you can change those later.

4. Complete Any Required Medical Exams

As part of the application process, you'll also undergo a medical exam. This will typically consist of an interview with a medical professional to learn more about your health history, as well as a physical exam.

The physical exam may involve taking your vitals and obtaining a blood and urine sample. For older applicants, an electrocardiogram and a cognitive test may also be required.

5. Get Approved

After the insurer completes underwriting, it'll inform you of your eligibility and policy terms. Carefully review the documents to make sure you're getting the coverage you want and can afford the premiums. You'll also want to understand potential coverage limitations.

Once you agree to the terms, sign the policy documents and provide your financial information to set up premium payments.

Learn more: Factors to Consider Before Buying Life Insurance

The Bottom Line

Both MPI and life insurance can provide financial protection upon your death, but the way they're set up can vary significantly. If you're a homeowner, it's important to make sure your loved ones are protected, but how you do it will depend on your health situation, budget and preferences.

Take your time to research and understand all of your life insurance options before deciding on a policy.