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Why Mortgage Protection Insurance Is Often a Bad Deal – The Motley Fool

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Don’t buy mortgage protection insurance until you read this.</…….

Image source: Getty Images

Don’t buy mortgage protection insurance until you read this.

Key points

  • Mortgage protection insurance is a type of life insurance that pays off a home mortgage if the policyholder passes away.
  • It can be more expensive and offer less coverage than other kinds of life insurance.
  • It’s usually better to buy a different kind of life insurance policy.

Mortgage protection insurance is a specific kind of life insurance. It’s different from private mortgage insurance (PMI). PMI is insurance that borrowers must buy if their down payment is below 20%. PMI protects lenders from losses in case of foreclosure. Unlike PMI, which is usually required on small down payment loans, mortgage protection insurance is totally optional.

Anyone who is thinking about buying mortgage protection insurance should understand how it works. There are some big downsides to this kind of life insurance, and it is usually not the best type of policy to buy.

How does mortgage protection insurance work?

Mortgage protection insurance is in effect while the policyholder has an outstanding mortgage loan. The homeowner with the loan pays premiums for the mortgage protection insurance. If the homeowner dies while there is still money due on the mortgage, the insurance pays off the remaining loan balance.

In some cases, mortgage protection insurance will also make payments toward a home loan in the event the policyholder becomes disabled while payments are still due. Only the principal and interest are paid with most policies, not any other costs included in a monthly mortgage payment, such as property taxes or home insurance costs.

Why is mortgage protection insurance a bad deal?

It may seem tempting to buy mortgage protection insurance in order to ensure surviving family members can remain in a shared home in case of an untimely death.

However, mortgage protection insurance is not usually the best type of protection to put in place for a few key reasons:

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