Should I Get Term Life Insurance or Mortgage Protection Life Insurance?

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Now that you’ve taken the plunge and finally purchased a home, with help from a home loan, you might be wondering if you should also take out life insurance as a safeguard if something unfortunate happens before paying off your mortgage. Your estate would be legally responsible for unpaid debts.

To prevent this from happening, you could consider getting Term Life Insurance or Mortgage Protection Life Insurance. But which option is better, especially with regard to asset protection?

Term Life Insurance vs. Mortgage Protection Life Insurance (MPI)

Most homeowners with home loans opt for standard term life insurance. This type of life insurance offers a huge payout specifically designed to address lost income in case the policyholder passes away. By contrast, mortgage protection life insurance or MPI offers a lower payout since it’s designed for covering home debt exclusively, meaning that the payout should only be utilized for settling the outstanding balance of your mortgage.

On the other hand, term life insurance offers you the choice of utilizing the settlement for anything you want. You could continue the mortgage or pay it off, invest the money, or perhaps just save it. This insurance type makes it the more flexible choice.

Aside from the inflexibility of MPI, this option also comes with high protection insurance rates that you would have to pay for diminishing returns. This means that with MPI, you’d have to pay for coverage with higher premiums that reduces every year as your home loan amortizes.

Every time you make a mortgage payment, your MPI’s value decreases because there’s less debt for your insurance provider to pay off. With term life insurance, however, you could negotiate more reasonable premiums and secure coverage with a much bigger payout that won’t lose its value.

In some instances, however, MPI might make more sense for some homeowners. For instance, those who can’t get term life insurance due to health issues could opt for MPI since it doesn’t require medical exams.

In addition, the Veterans Affairs offers veterans and service members Veterans’ Mortgage Life Insurance for those suffering from severe disabilities they’ve obtained during service, considering that they qualify.

Main Takeaway

Financial experts typically advise against insurance plans that pay only individual bills, which is what mortgage protection life insurance is. If you are worried about your family inheriting your home loan that they couldn’t possibly pay off, term life insurance might be the most suitable option for you. With it, you’d pay reduced rates and obtain a higher payout that won’t lose its value.