Mortgage Payment Protection Insurance
Purchasing a house is a major turning point in most people's lives. This is made even more so by the large debt most of us take on when buying a house – the mortgage. This is also the perfect time to consider another change – purchasing life insurance.
If you're surprised at the change of topic, don't be; we're still talking about your mortgage. But first, let's consider what your new mortgage means, both to you and your bank.
The bank has agreed to loan you a significant amount of money. You, in return, have agreed to pay back that amount, and a certain interest on top of it, over a predetermined number of years. Both you and the bank have gained something from the transaction, and that's where life insurance comes into play.
The bank, in lending you the money, has accepted a certain amount of risk. The bank's goal is to make the most profit possible from the exchange, which it can do if you pay off your entire mortgage, in an orderly and regular fashion. You, on the other hand, want to keep your house, which the bank will repossess if you fail to make your mortgage payments.
Your bank, in an attempt to lower its risk, may offer you what is known as mortgage insurance. Should you pass away, the insurance policy will come into effect, paying off the remainder of your mortgage balance. This protects both the bank's money and your family's home, since your survivors might not have the funds to continue making mortgage payments.
The idea of insuring your family against the loss of their home is a laudable one, but your bank may not be the best source of that insurance. Consider the following:
- The bank's specialty is money lending first and investment second. Providing insurance is, at best, a distant third. You are likely to be offered a policy that suits the bank's interests better than it does yours – after all, the bank is far from an uninterested party in this transaction. You are also unlikely to get the best rate around, since the bank is only marginally interested in selling insurance.
- Generally, the premiums on a mortgage payment protection (MPP for short) policy remain the same throughout, but with every mortgage payment you make, the benefit amount decreases.
- The final, and most important point is that MPP insurance guarantees only the mortgage. Your paycheck most likely exceeds the amount of your mortgage payments. In the event of your death, the MPP benefits will fall far short of replacing your paycheck.
If your goal is to protect your family's standard of living in the event of your unexpected death, you may want to consider a term life insurance policy, instead. With a term life policy, the benefit amount will not decrease over time, and may exceed the amount of your mortgage, allowing your survivors to both pay off the mortgage balance and continue paying the bills.
