One of the most interesting financial products available to homeowners is “mortgage protection insurance.” This type of mortgage insurance is designed to help borrowers continue repaying their loans in the event that they are unable to make payments. While some people find mortgage protection insurance helpful, most homeowners consider it superfluous ― and expensive.
It is important to note that mortgage protection insurance is completely different from “private mortgage insurance” (PMI) and “government mortgage insurance.” Protection insurance is about helping the borrower make mortgage payments or pay off their loan balance. PMI and government mortgage insurance, on the other hand, focus on protecting the lender.
Types of Mortgage Protection Insurance
There are 2 main types of mortgage protection insurance:
- Mortgage Life Insurance ― pays off your entire mortgage loan if you die
- Payment Protection Insurance ― pays your outstanding balance if you lose your job, or if you become disabled and cannot work
For most people, mortgage life insurance is unnecessary. With a good term life policy, it is possible to get enough coverage (at a relatively low cost) to pay off the mortgage in the event of your death. You should probably only consider mortgage life insurance if you’re unable to obtain traditional life insurance coverage.
As for mortgage payment protection insurance, there are other options you may want to consider instead. Most disability policies will help you make your mortgage payments if you are injured. Building up a good emergency fund also can help you meet your mortgage obligations in the event of a job loss. These are important factors to consider before buying mortgage protection insurance.
Mortgage Protection Insurance Considerations
One of the main drawbacks of payment protection insurance is that it only covers your overdue loan balance ― it will not pay off your entire mortgage. So while this type of insurance may bring you up-to-date on your loan, you may still have problems if you cannot afford the other costs of owning a home (including property taxes, homeowners insurance, utilities, and general maintenance).
There are various mortgage protection policies available, each with different requirements. A single policy is unlikely to cover both disability and the loss of life. In some cases, mortgage disability insurance will not extend to job loss. You should carefully review any insurance policies you are considering to ensure that you’re getting the kind of protection you need.