Homing in on loan payment protection insurance policies
THE HERALD - 18TH SEPTEMBER 2002
It may not be as easy as you think to claim on mortgage payment protection insurance.
Almost four years ago the previous Government curtailed the amount of state help available from homebuyers unable to keep up mortgage repayments because of redundancy or ill health.
Many homebuyers still believe the state will step in quickly with financial support if they can’t afford to keep up their monthly payments, but they couldn’t be more wrong.
Anyone with a mortgage take out before October 1995 now has to wait 26 weeks before they’re in line for full assistance with their interest payments. Those who have taken out a home loan since then have to wait even longer – 39 weeks – before they are eligible to get their interest paid.
However, the DSS estimates more than 75% of homeowners won’t qualify for any state support at all because they have more than £8,000 in savings or have a partner working over 16 hours a week.
Not surprisingly, there has been an increase in the number of homebuyers taking out private insurance to cover their mortgage repayments in the last four years. Some 2.5 million policies are now in force with one-in-four homebuyers covered.
But figures complied by the Personal Finance Research Centre reveal that more people still rely on state support than are claiming on private insurance policies. The latest statistics show that in 1996 451,000 homebuyers received state help with their mortgage, while only 52,500 received payments from an insurance plan.
There are several reasons for this. Claims under a private policy are usually limited to redundancy, illness or injury. State support can cope with a wider range of problems including marriage breakdown or death of a partner. Indeed almost tow out of every five people claiming state support would not have qualified under a private policy.
Homebuyers can have trouble getting insurance companies to pay up on private policies. Three out of ten claims are rejected often because they are for something not covered by the policy.
Earlier this year the Government started a campaign to double then umber of private policies, with the Housing Minister calling on the industry to improve cover.
In a move to encourage more confidence in mortgage payment protection insurance, the Association of British Insurers and Council of Mortgage Lenders jointly introduced new minimum standards. These included:
• All polices to pay out after a maximum of 60 day. In the past some policies only started to pay up after four months, increasing the chance of borrowers falling into arrears.
• All policies to provide cover for no less than 12 months.
• Fewer automatic exclusions for conditions such as pregnancy complications and backache.
• A minimum of six months between changes to policies.
• A better and more standardised approach to unemployment cover for self-employed and contract workers. Contract workers will be able to claim for unemployment provided they have worked for the same employer for at least a year.
The trouble is that insurers and mortgage lenders don’t have to change existing policies to comply with the new standards until next July. Until they do, homebuyers could still end up with a policy which fails to deliver.
Most people buy repayment insurance when they take out a new mortgage and usually end up with a plan sold by their lender. That could be a mistake.
This month’s edition of the consumer magazine Which? slammed the big banks, saying their products offered “appalling value for money”. It said: “Instead of repaying your loyalty by offering you preferential rates, your bank is more likely to take advantage of it by selling you poor value products.” Which? looked at mortgages, savings, loans, credit cards, contents and buildings insurance, but it’s clear mortgage repayment insurance could be included too.
“Policies sold by banks and building societies are very expensive compared to those sold by insurance brokers,” days Simon Burgess, managing partner at underwriting agency Burgesses, which has just launched a new policy called Securityfirst. “It’s vital that homebuyers shop around, by asking a reputable insurance broker for advice. There are much cheaper and better policies available.
“Mortgage lenders typically take 60% in commission on the policies which pushes up the price – we take 20% - and they rarely provide cover for living expenses over and above the mortgage payment and endowment. If you’re an existing borrower you may not be able to buy this type of insurance from your mortgage lender at all.
“Another problem is that you cannot take the policy with you if you change lenders when you move or remortgage. This means you’d have to start a new policy and go through the initial waiting period again before you could claim.
“What’s more I believe that mortgage lenders are refusing to offer cover for certain occupations. Ironically, bank workers are excluded from unemployment cover, and groups considered by mortgage lenders to be high risk, such as nurses, will not be offered disability cover. Lifestyle questionnaires exclude gay men.”
The Securityfirst policy is underwritten at Lloyd’s and available to both new and existing self-employed and contract workers. It offers three months’ free cover (premium payments don’t start until month four), and an extra 25% cover for the life of the policy.
Pease of mind for job loss
When foreign exchange trade Bridget McFarlane, who was born in Springburn but now lives in Essex, explains: “I was told it didn’t provided cover for existing borrowers.”
Barclays says this type of policy can only be taken out within four months of starting a new mortgage with it.
McFarlane, who has just been discharged from hospital after being injured in a fall outside her home, says: “I am separated with two children and I wanted to make sure that my mortgage, household and life insurance premiums would be paid along with some extra money to live on if I was made redundant. I was looking for cover for just over £2,000 a month.”
If Barclays had been able to provided cover it would have cost McFarlane just over £94 a month, based on a premium of £4.60 for each £100 of cover. Through her Securityfirst policy from Burgesses she pays £71.68 a month.
If she’d been eligible for the Barclays policy she would have had to wait 60 days before claiming for unemployment. With Securityfirst, new borrowers can make a claim after only 30 days.
