For some hard-working families, Mortgage Protection Insurance represents the best way to protect their investment in a home.
Sorting-out the alphabeticals
You may experience some difficulty distinguishing “PMI” from “MPI,” especially because the “M” always stands for “mortgage,” and the “I” always stands for “insurance.” Therefore, “P” plus the letters’ sequence make a huge difference, because PMI and MPI serve radically different purposes: PMI protects your lender against your default. MPI protects you against losing your home.
“PMI” signifies “Private Mortgage Insurance,” and the law requires you carry PMI if you put less than 20 percent down on your home. In the mortgage industry, the conventional wisdom says that PMI encourages lenders to offer mortgages for first-time home buyers who have less cash and respectable credit. Since the housing “bubble” burst and major lenders raised their mortgage qualifying standards, mortgages with high loan-to-value ratios have grown increasingly rare, so that insuring your mortgage against default no longer seems a big issue. As soon as you reach 20 percent equity in your home, you may cancel your Private Mortgage Insurance; in fact, your lender now has a legal obligation to notify you when you become eligible for PMI cancellation. In some cases, eliminating PMI premiums saves homeowners more than $1000 every year, but cancellation does also eliminate a nice tax deduction.
“MPI,” on the other hand, stands for “Mortgage Protection Insurance,” and it belongs to the larger family of life insurance products. Your lender cannot require Mortgage Protection Insurance; and, unlike Private Mortgage Insurance, you cannot claim it as a tax deduction. Mortgage Protection Insurance guarantees that, if you die or suffer permanent disability, the insurance company will remit a check directly to your mortgage-holder, paying-off your mortgage and giving you title to your home. In simpler terms, MPI guarantees your family can keep your home no matter what happens to you. You must understand, however, MPI does nothing but guarantee your home loan; your family receives no other cash or compensation.
Mortgage Protection Insurance on its merits
Mortgage Protection Insurance may have an important place in your Family Frugality Plan. If it effectively complements other benefits and will cost less than whole-life coverage, then MPI warrants serious consideration. Because most MPI plans work on a “guaranteed acceptance” basis, you may qualify for Mortgage Protection Insurance when you do not qualify for or would have to pay extortionate prices for more conventional coverage because you have serious health issues or work in a high-risk occupation. For most families, MPI either will be redundant, or it will offer no significant advantage, because your house payments are low enough your family will gain more benefit from standard life insurance pay-outs. Still, you must consider…
MPI may complement other death benefits. Above and beyond the standard Social Security death benefit, you may have other death benefits attached to your retirement or pension plan, or you may carry a low-cost term life insurance policy to cover your final expenses. If you current coverage will pay-off all your debts except your mortgage, then MPI may work for you.
MPI may replace other life insurance coverage. In general, traditional life insurance that accrues cash value represents a solid, stable investment, but your insurance company determines your premiums according to your life expectancy, medical history, occupation, and sometimes your credit history. If you seem a high-risk candidate for traditional life insurance and, therefore, will have to pay extremely high premiums, MPI represent the guaranteed low-cost alternative.
MPI may provide for your family’s peace-of-mind. If you have little or no family and your spouse never has worked outside the home, you may worry that your family cannot keep a roof over their heads after your passing. Moreover, you may have substantial equity in your home, and the payments may be extremely low, so that your family will benefit substantially from keeping the house. Under those circumstances, MPI makes sense for you.
MPI protects your greatest asset. If you built your own home, or if your home has played a prominent role in the family’s history, you have a vested interest in keeping it in the family. MPI, then, guarantees title to the house will pass to your heirs.
Before you consider any insurance purchase, your Family Frugality Plan should focus on savings and investments. Build a $1000 liquid emergency account, and contribute to a Certificate of Deposit that ultimately will contain the equivalent of six months’ salary. With those safeguards in place, you may consider how to protect your home and other major assets.
Andrew Greene is a freelance financial writer who blogs for ppiclaims.org.uk where you can get help with ppi claims.