Understanding Mortgage Protection Insurance (MPI)

13/11/2015 15:12

Insurance over any property is taken out by consumers that protect them from unforeseen circumstances in the near future. Those of you who have taken a home loan must beware that after you finalized your mortgage deal, your lender may have advised you to purchase a Mortgage Protection Insurance (MPI).

Often the tactic used to sell MPI is an emotional plea such as “What if you die suddenly? Would your family be able to continue paying the mortgage and maintain the same quality of life?” Without this plan, the solicitations say, “your family would still have to make your monthly mortgage payments.” This special insurance scheme is designed to cover your mortgage payments in the event of your death, disability or unemployment.

Well, do not let emotions dictate you.

What you must do is analyze the insurance offer first before committing to it.  At the end of the day, it is like any other insurance cover. While, there is peace of mind, you will never really know if you or your loved ones will ever reap the benefit from the cover.

It is significant to note that MPI is not compulsory insurance unlike insurances that are applicable to a property. Compulsory insurances include cyclone and other natural disaster insurances or fire insurances. In the case of MPIs, borrowers have a choice to purchase it or not.

Below are the reasons why property owners do not need to purchase MPIs:

  • No flexibility/certainty – with a regular life insurance policy, your survivors or caretakers can use the money they receive as they deem fit. With MPI, the insurance company pays directly to the lender. Then, a better option is a policy that pays your loved ones directly.
  • High premiums – you may be paying more for MPI than for simply a life insurance cover every year. Consumers must compare the rate of premiums charged for MPI with a life insurance cover before opting to purchase MPI. At least with a life insurance cover, your loved ones will be better placed as they themselves will receive a payout sum.
  • A Savings account as an alternative – imagine, if you did not opt to buy MPI and instead, deposited the same premium amount in a savings account. At the end of a certain number of years, you would be having a saving plus the interest, which you would have earned. This investment is far more pragmatic than paying for insurance options such as MPI.

Case Study

Simon was a manager at a popular service station. He obtained a home loan worth $82,306.75 in August 2006. As the years went by, Simon obtained four additional loans totaling $18,109.87 in this same home loan account.

Whilst obtaining these loans, Simon, however, subscribed for the Mortgage Protection Insurance (MPI). He was content with his decision to have invested in the MPI coverage. In the event some unfortunate circumstances befall him, his family would not have to cater for the monthly account repayments of $649.98. Each of his monthly repayment included a MPI premium of $44.96.

Unfortunately, Simon passed-away due to a heart attack on 27th April 2011. He was now survived by his unemployed wife, Eleini and 10 year-old son, George

Following Simon’s death, Eleini made an application for the MPI via the bank with which Simon had the loan account. The MPI application was declined on the basis that Simon had failed to disclose his pre-existing medical condition in his policy form.

Simon had not disclosed his illnesses to the insurer. It was most unfortunate, that his family could not benefit from the MPI which Simon was paying for. He purchased the MPI in a hope that his loan would be taken care of during some unforeseen circumstances.

There is much to learn from Simon‘s experience. If he had opted to deposit the amount he paid as premium for MPI every month, there would have been a saving for his loved ones.

The other lesson to learn is one must provide all necessary information to his/her insurer. It is advisable that a consumer should seek independent mortgage advice before taking out a mortgage. It is also important that he/she discloses all the information to the insurance company to ensure that his/her families do not suffer in future.

Borrowers must take the time to shop around before making a final decision. They need to know the details of the policy before making any commitments. Questions that they need to ask are: what is covered under the policy, the monthly costs, the final payout amount, what is the date of maturity of the policy, and any other features that are important to the insured and his/her family.