Two very different goals: protecting you or protecting the lender
"Loan protection" covers several products that are easy to confuse. Some protect the borrower and the borrower's family by paying the debt after death, disability or job loss. Others, such as private mortgage insurance, protect only the lender. Knowing which is which is the first step to deciding whether a product is worth paying for.
Credit insurance on consumer loans
The Consumer Financial Protection Bureau (CFPB) describes several types of credit insurance commonly offered with auto and other consumer loans:
- Credit life pays off all or some of the loan if you die.
- Credit disability (also called accident and health) makes loan payments if you become ill or injured and cannot work.
- Involuntary unemployment makes loan payments if you lose your job through no fault of your own, such as a layoff.
- Credit property covers the financed item, such as a vehicle that is stolen or destroyed; the CFPB notes this is often already part of regular auto insurance.
The CFPB stresses that credit insurance is optional. If a lender says you can only get the loan by buying it, you can complain to the CFPB, your state attorney general, your state insurance department or the FTC. Adding credit insurance to the loan increases the amount financed and the interest you pay, its price can be negotiated, and you generally have the right to cancel it and may receive a refund if you pay off or refinance the loan early. The CFPB places GAP coverage in the same group of optional add-ons.
Private mortgage insurance (PMI)
PMI is different: it protects the lender, not you. The CFPB explains that it is typically required on a conventional mortgage when your down payment is less than 20 percent of the purchase price, or when refinancing with less than 20 percent equity. If you fall behind on payments, PMI does not protect you from foreclosure. It can be paid as a monthly premium, a one-time premium at closing, or a combination.
For single-family principal residences closed on or after July 29, 1999, the Homeowners Protection Act gives you cancellation rights, as summarized by the CFPB:
- You can request cancellation in writing when the balance reaches 80 percent of the home's original value, if you have a good payment history and meet the other conditions.
- PMI generally ends automatically when the balance is scheduled to reach 78 percent of original value, if you are current.
- It must end after the midpoint of the loan's amortization schedule, such as year 15 of a 30-year loan, even if 78 percent has not been reached.
FHA and VA loans follow different rules, so check with your servicer.
Mortgage protection insurance (MPI)
Mortgage protection insurance is usually a form of decreasing term life insurance, sometimes with disability or unemployment riders, that pays the mortgage balance if the borrower dies. Unlike PMI, it benefits your family. Its drawback is that the payout often goes to the lender and the benefit shrinks as the loan is paid down, while the premium may stay level. Many households get more value from a standard term life policy sized to cover the mortgage and other needs, plus disability insurance for income protection.
Comparing the options
| Product | Who it protects | Required? | Main alternative |
|---|---|---|---|
| Credit life | Borrower's estate and co-signers | Optional | Term life insurance |
| Credit disability | Borrower | Optional | Individual or group disability insurance |
| Involuntary unemployment | Borrower | Optional | Emergency savings |
| PMI | Lender | Often required with less than 20% down | Larger down payment |
| Mortgage protection (MPI) | Borrower's family | Optional | Term life plus disability |
Questions to ask before you buy
- Is this product required, or optional? Get the answer in writing.
- Is the premium added to the loan balance, and how much extra interest will that cost?
- What are the exclusions, waiting periods and maximum benefit periods for disability or unemployment?
- Who receives the benefit: the lender, or my family?
- Can I cancel at any time, and how is a refund calculated?
- Would term life and disability insurance give more cover for the same money?
How Polis Re can help
Polis Re helps you compare term life, disability and mortgage-related options from different insurers so you can decide whether a lender's product is the best value. Policies are issued by licensed insurers and placed through licensed producers in your state. See also our guide to term vs whole life insurance, or request a quote.