One of the most common questions we hear from clients is, “I purchased PMI when I purchased my home. I already have mortgage insurance; why would I need mortgage protection?” Private Mortgage Insurance (PMI) does not protect you, your family, or your loved ones if you are not able to make the payments on your loan. PMI protects the lender only!
What is PMI?
PMI - Private Mortgage Insurance is a type of insurance that protects the lender if you were to stop making the payments on your loan. It does not protect the borrower, the borrower's family, or other dependents.
PMI is set up by the lender when you purchase a new home or refinance. The lender sets this up with a private insurance company. When you buy a home with less than 20% down, the lender will most likely require you to purchase PMI. It protects the lender if you stop making payments on your loan.
If you were to pass away unexpectedly, and your loved ones are not able to make the payments on the home, the lender would still foreclose on your home and leave your loved ones without a place to live.
PMI vs. Mortgage Protection Insurance
Mortgage Protection insurance is different. Mortgage protection insurance would protect you if you pass away or become permanently disabled. You can choose who you want to be the beneficiary and who you want to receive the money. If you were to pass away, the death benefit could be used to pay off the debt owed.
Let's look at an example. John and Jenny purchase a home for $500,000. They can use a down payment of $50,000 to buy the house. Because the down payment is less than 20%, the lender requires them to purchase PMI when they close on the loan. This is an added payment to their loan payment. They decide later not to purchase mortgage protection insurance or life insurance. When John passes away, Jenny is responsible for the continued payments on the loan. The bank will foreclose on the property if Jenny can not make the payments. The PMI is triggered and paid to the lender. The lender receives the home and the insurance money.
Let's look at that same scenario but add mortgage protection insurance to the equation. After the couple purchases the home, they each buy a mortgage protection insurance policy for $450,000. When John passes away, Jenny can use this death benefit, tax-free*, to pay off the mortgage leaving the home free and clear of debt. She no longer has the mortgage payment, and she also has no more PMI insurance. More importantly, Jenny and the family are able to stay in the home.
Suppose you currently have a loan on your primary mortgage. In that case, having your own personal mortgage protection or life insurance policy is essential. Mortgage protection or life insurance is the only way to guarantee you a known sum at an unknown time. Agents at Aultium Insurance Services have over 75 combined years of service. They specialize in life insurance and mortgage protection insurance. If you would like a free quote on how mortgage protection can protect your home - please click below. If you would like to read more about Mortgage Protection Insurance you can click here.