Is accident insurance a worthwhile proposition?
THE TIMES - 27TH NOVEMBER 2002
Taking out special cover to protect your mortgage payments should disaster strike seems like a sensible thing to do. But loopholes in mortgage payment protection insurance means that homeowners are not always covered.
A survey by GMB Scotland, the union, this week revealed that Britain’s biggest mortgage lenders discriminate against employees who leave their jobs because they are forced into short-time working. The study of the top 20 mortgage lenders showed that the schemes do not pay out to people taking redundancy after being put on reduced hours.
Employees in this situation are therefore effectively left with the choice of wither trying to survive on less than half their normal wages or having their homes repossessed.
The Association of British Insurers said that insurers had to balance borrowers’ circumstances with the cost of the premiums.
The findings are a setback in the Government’s drive to encourage more homeowners to take mortgage protection rather than rely on state help. It will also deal a further blow for an insurance product that has been criticised as expensive and riddled with loopholes despite a new code of minimum standards brought in on 1st July.
Accident, sickness and unemployment insurance is designed to cover monthly mortgage bills for an average of 12 months, when if the policyholder is still out of work, he should become eligible for help from the State.
Homeowners who are unable to work and are claiming either income support or job seekers’ allowance can claim Ismi – income support mortgage interest from the State. The relief is only available for the first £100,000 of the loan and homeowners often have to wait long excess periods – the delay between losing your job and receiving the policy’s first benefits.
Those who took out their mortgages since 2nd October 1995, receive no help for the first 39 weeks. Homeowners whose loans were set up before then, get nothing for the first eight weeks, 50 per cent of the interest for the next 18 weeks and full relief after that.
State mortgage relief is also part of means-tested income support. Therefore applicants with more than £3,000 of savings will see their benefit cut, and lost altogether if they have more than £8,000.
However, although state help is hardly generous, homeowners continue to shun private insurance. The Government would like to see one in two borrowers taking out such cover but the figures are closer to one in three.
Those who do take cover, normally buy it from their mortgage lender especially as some banks and building societies offer free insurance for the first six months. But the cost of accident, sickness and unemployment varies immensely and homeowners could be losing out by not shopping around.
At Abbey National’s current variable interest rate of 7.19 per cent, the monthly payment for accident, sickness and unemployment cover on a £70,000 mortgage is £29.66 a month. That translates into a premium of £6.04 per £100. The excess period is 28 days.
The offer from Halifax is slightly cheaper at £5.30 per £100. Like the offer from Abbey, homeowners get claim cover after 30 days. But those insured with the Halifax have an added benefit. Unemployment cover extends to two years rather than the industry standard of 12 months.
John Charcol Insurance Brokers offers a variety of options ranging from £4.50 to £5.99 depending on the length of the cover and excess period. However, those taking the rock bottom premium of £4.50 per £100 will have to wait for 90 days before the insurer pays out and will be covered from only nine months. Cover lasting the full 12 months with an excess of just 30 days, costs £5.99 per £100.
Burgesses, an insurance underwriter which specialises in accident, sickness and unemployment, charges one of the lowest rates at £4.40 per £100 even thought the excess period is still 30 days.
It is possible to cut the cost of the premiums by restricting the type of cover. About 70 per cent of homeowners taking out mortgage payment protection insurance opt for unemployment-only cover rather than anything else.
Those taking out unemployment protection with Abbey National would pay £4.31 per £100. Meanwhile John Charcol Insurance Brokers would charge far less at £3.75 for similar cover.
However this type of cover is of little use if you apply after you realise your job is on the line. Philip Watson, director at John Charcol Insurance Brokers, says: “It is common during the claims process to write to the human resources department to ask if the claimant had any idea that they would be losing their job.”
Unlike other types of insurance, accident, sickness and unemployment insurance premiums are not related to age, occupation, sex or location. The cost of your cover will only depend on the size of your mortgage. But homeowners can be refused cover if they do not fit the insurer’s or lender’s criteria.
Bridget McFarlane was refused cover by her lender when she took out a mortgage with Barclays Bank ten years ago. Since then Mrs McFarlane, who lives in Essex, has found alternative cover with Burgesses. The mother of two has been claiming on her insurance since a back injury in September prevented her from going to work. “Being a single parent with two children aged five and eight, you really need to know that your mortgage will be paid,” she said.
