Private Mortgage Insurance, or PMI, is insurance that protects the lender in case you default on your loan. With conventional loans, mortgage insurance is generally not required if you make a down payment of at least 20 percent of the home's purchase price. (Note, however, that FHA and VA loans have different insurance guidelines.)

Private mortgage insurance is generally included in your monthly mortgage payment and may be tax-deductible (double check with your tax advisor). Of course, lenders know that not every home buyer has the funds to provide a 20% down payment. That's why some lenders offer innovative loans designed to avoid costly private mortgage insurance.

To answer your second question, PMI is designed to protect the lender or the company servicing your loan in case the homeowner defaults. The reason PMI exists is exactly for the reason you mentioned… as insurance to the lender/servicer in case the homeowner is unable to manage the home loan payments any longer.

Hope this helps!