For many American households, a mortgage remains one of the most significant expenses. It is so huge that sometimes the owner dies before it gets fully paid.
This scenario can lead to many problems, especially for the heirs, like spouses and children. One of the best ways to prevent complicated mortgage-related situations upon death is to talk to a law firm specializing in estate planning.
In estate planning, experts guide you on protecting your assets from debts like mortgages and improving your tax efficiency (because taxes don’t die with you).
Mortgage-related Insurance Policies to Choose From
Usually, your mortgage-related insurance policies could either or all of the following:
1. Private Mortgage Insurance (PMI)
Many lenders demand their borrowers to put up at least a 20 percent down payment when applying for a mortgage to reduce the risks of default. But raising this amount is often difficult for a lot of people.
If your down payment is below 20 percent, lenders will approve your loan on one condition: you get private mortgage insurance (PMI). This insurance policy guarantees that if you default, your lender can still receive the full loan back.
Depending on the setup, you pay the PMI premium every month, along with your loan repayment. You stop paying it if your loan-to-value ratio is already high, such as 80 percent and above.
If you die, the lender will come after your estate unless the loan has a co-signer or someone in your family inherits the property, in which case they will be responsible for repaying the rest of the debt. If your assets are not enough to satisfy the debt, then PMI will pay the balance.
2. Mortgage Protection Insurance (MPI)
A lot of people confuse private mortgage insurance (MPI) and PMI. Not only are the abbreviations look eerily the same, but they share similar benefits. With MPI, the lender will continue to receive mortgage payments even if you die or suffer from a disability (depending on the actual coverage).
But they also have stark differences:
- PMI will pay the lender regardless of whether you die or not. As long as you default and foreclosure won’t satisfy the balance, your lender will receive money from the policy.
- MPI is specific for people who want to see to it that their loved ones can continue paying the mortgage even after death or during a disability. However, the beneficiary of the policy won’t be any of the heirs but the lender.
Some get MPI with credit disability insurance or accident and health insurance. With this type of policy, the borrower’s lender will receive compensation in case you become unemployed or sick and cannot make payments.
3. Mortgage Life Insurance Policy
MPI might also be confused with mortgage life insurance, which is a kind of term insurance. This means it provides payments over a specific period only.
Unlike a traditional life insurance coverage, where the beneficiaries receive an amount, and they’re free to use it in whatever way, mortgage life insurance is specifically to pay the balance of the home loan upon death.
This insurance coverage can be similar to MPI in the following ways:
- The lender is also the beneficiary of the policy. Your family or heirs won’t receive any money from the policy.
- It satisfies the balance of the home loan.
- It can also cover disability or other reasons you cannot work.
But in mortgage life insurance, the lender may receive the amount in bulk instead of monthly. Moreover, the coverage can decrease over time to match the balance of the loan.
Now, which is better to get: traditional life insurance or mortgage life insurance? There are pros and cons of each, so consider talking about it with your estate planner or lawyer. However, some opt for traditional life insurance to give them flexibility on how they use the money. This is especially helpful if you have a lot of debts that can’t disappear once you die.
Debts cannot haunt you if you die, but they can be a hassle and trouble for the family you leave behind. Creditors can run after your estate, and families might be forced to sell the property or foreclose it to satisfy the balance. Either way, your loved ones will lose a house.
Even if you think you will outlive the mortgage, consider protecting your property with insurance. Make it a priority if you plan to leave the house to someone, perhaps as a gift or donation.