How much do you really need to spend to protect yourself in times of crisis?
WREXHAM EVENING LEADER - 11TH MAY 2005
As the collapse of MG Rover has underlined, more private sector jobs are under threat than many realise in a ‘booming’ economy.
No wonder, with household debt at record levels, nervy borrowers want to insure monthly repayments on mortgages and personal loans.
If unemployment, sickness or serious accident slash monthly income, this cover can stave off trouble and buy time to repair household finances.
Mortgage payment protection insurance can offer up to two years’ cover for monthly repayments, plus optional cover for other monthly bills. Most policies pay for 12 months in the event of a claim before State benefits can kick in.
This week, Nationwide Building Society, usually high in any league table of good value mortgages, promised free mortgage payment protection insurance for three months to new borrowers and existing borrowers moving home.
Among its rivals, Bristol & West, Royal Bank of Scotland, Britannia also offer free mortgage payment protection insurance for short periods. Those which don’t include Abbey, Alliance & Leicester, Halifax and Woolwich.
In due course, however, Nationwide comprehensive cover against accident, sickness and inability to work costs from £5.39 per £100 of monthly repayment covered each month.
Its offer highlights a campaign which independent broker Simon Burgess has mounted for months.
He claims mortgage payment protection insurance and similar ‘protection’ sold with personal loans, draining millions from households which don’t realise they are wasting money.
As interest rates have fallen, crafty lenders have bumped up insurance charges to boost profits. Barclaycard’s £5,000 loan at 5.7 per cent APR, for instance, costs £756 to insure over three years, knocking it out of the Best Buy tables.
On a typical five-year personal loan of £7,500, says Burgess, borrowers who seek cheaper cover can slash total repayments by £1,450.
Most lenders, says Burgess, take high premiums knowing the money goes straight to profits. On mortgage payment protection insurance, he says, barely five per cent of premiums collected is sued to settle claims.
Cover to pay £500 a month to a borrower in distress need cost only £20 a month, says Burgess, while traditional lenders average £29. expensive cover may be poorer quality than the cheaper alternative.
On personal loans, Burgess is equally scathing. Sales of loan payment protection insurance running at the rate of more than 1,000 an hour, he reckons, could generate £22 million a day, or £8 billion a year, in commission for lenders. With sales staff incentivised to push insurance, as many as 75 per cent of personal loans include an insurance package.
On a £10,000 Halifax personal loan, Burgess says total insurance cost over five years is an astonishing £2,437.20. he offers adequate cover form £891, saving £1,546.20.
Some lenders might breach guidelines laid down by the Financial Services Authority, the Government watchdog, by failing to check if applicants have a pre-existing medical conditions which could invalidate cover in the event of a claim.
So how can mortgage borrowers and personal loan customers insure their repayments at a fair price?
In many cases, they are told lenders’ payment protection insurance is a condition of taking a loan, though FSA rules say customers can always seek an independent quote.
Based in Braintree, Essex, Burgess champions the role of independent brokers like him in the British Insurance Brokers’ Association and has several times topped Which? magazine Best Buy insurance tables.
With BIBA, he offers policies to cover mortgage and loan repayments more cheaply than most lenders’ products.
Check them out before you sign up for a loan and your savings could run into several hundred pounds.
