Masterclass Mortgage Protection – Protect your biggest asset!
HEALTH INSURANCE - 1ST APRIL 2004
Mortgage lenders have come under fire recently for overcharging individuals for mortgage payment protection insurance. It is the job of intermediaries to make clients aware of all the mortgage protection options available to them, writes Sam Barrett.
Given the Brit’s passion for home ownership and all things property related, the mortgage protection market is one that is well worth a close inspection.
The is certainly the view taken by Simon Burgess, managing director of Burgesses. He says: “Advisers are leaving vast amounts of money on the table by not looking after their clients’ protection needs. And they’re also leaving these clients to the mercy of the unscrupulous lenders.”
Burgess isn’t picking on the lenders over small amounts either. In research he carried out at the end of 2003 he found that the average cost of mortgage payment protection insurance amongst the major high street lenders was £6 for every £100 of monthly repayment, with the most expensive lender – Lloyds TSB – charging £7.70 for every £100. In comparison, the average premium amongst the independent providers was a third less at £4 for every £100 of cover.
The mortgage payment protection market is worth some £2bn, a potential £1bn of commission to advisers. And, thanks to the Governments endorsement, through the Council of Mortgage Lenders’ (CML) sustainable home-ownership initiative, it is a market that is growing steadily.
Although now shelved, this initiative set out to increase take-up of mortgage payment protection insurance to 55% of new mortgage borrowers by 2004. At its launch in 1999 only around 20% of mortgage holders had protection in place but, by January 2003 when it changed the focus of the initiative to reducing the number of repossessions it had succeeded in increasing the take-up among new borrowers, with more than 36% of new advances in the first half of 2002 including mortgage payment protection insurance.
Economic Factors
The CML reasons for the change in policy demonstrate the issues facing the market. For starters, economic factors played a part in its decision. Unemployment has remained low and with the property prices rocketing in the last few years homeowners have built up more equity in their homes, which can provide a useful safety cushion.
Additionally the CML found that other insurances such as income protection and critical illness cover were being used to offset mortgage payment risk. Indeed, sales figures from Swiss Re Life & Health show that mortgage related sales of these products did particularly well and account for more than half of all protection sales. Some areas did particularly well, for example mortgage and expenditure related income protection sales have increased by almost 50% on sales for 2001. Kevin Carr, senior technical adviser at Lifesearch, says: “It’s very possible the government decided that mortgage payment protection insurance wasn’t necessarily the right product to protect a mortgage repayment. The Department of Work and Pensions is looking at the issue of people being unable to work and it has focused heavily on rehabilitation as a means of keeping people in the workplace.”
But, whether mortgage payment protection insurance is the right product or not, most experts believe that it has its uses and, if the alternative is no protection at all, it is definitely worth recommending.
It’s a simple product to understand, which is perhaps one of the key reasons behind its success. What is covered, how much will be paid out and for how long are all easy to understand factors to consider and with a once-price-fits-all moratorium pricing model, underwriting is fast and simple.
Product options
Indeed for some people it is a very good option, as Carr explains: “If someone has an area of their life that is perceived as high risk by the insurers – for example, you smoke, are older or have a risky job – mortgage payment protection insurance can be a good option.”
Nick Homer, product marketing manager for income protection at Norwich Union, agrees: “It’s not going to offer great value for an 18 year old clerical worker but if you’re a 55-year-old builder you’ll definitely benefit from the way it’s priced.”
Policies vary greatly. Of the 200 or so currently available you can select ones that cover accident, sickness and unemployment; accident and sickness only, which can be useful for the self-employed market or those people who do not worry about unemployment: or unemployment only, which can complement products such as income protection. Terms vary too. Most policies will cover for either one year or two, typically following a deferred period of either one or tow months although some policies operate on a back to day one basis.
These features are reflected in the premium. For example, according to Moneysupermarket.com, covering a £600 monthly repayment on the Burgesses Gold policy with a 12 month payment term and a 30 day deferred period would cost £25.50 a month for accident, sickness and unemployment cover of £16.50 a month if an individual chose accident and sickness or unemployment only.
The Downsides
But there are downsides too. Possible the biggest sting with these types of products is the yearly renewable contract. This means that should a client make a claim for a particular condition, under the moratorium they won’t be able to claim for it again.
The limited payment term can also cause problems, as Homer explains: “One or two years’ payments is great from many things but if someone is off sick for longer, then these products are really deferring the problem.” This is especially true as once someone has been off sick for six months there is only a 50% chance of their returning to work, according to recent reports, so many of the claims that last the full term of an mortgage payment protection insurance policy will often be permanent.
These shortcomings highlight an alternative protection solution, namely income protection. Unlike mortgage payment protection insurance, no one can take income protection away, however much an individual claims. Likewise, it will pay until the end of the term, which can be set to coincide with retirement or, with the mortgage related products, the end of the mortgage term.
The potential liability faced by the income protection insurer also means that they will often take a more proactive approach to rehabilitation. “Our long-term liability on income protection could run into hundreds of thousands of pounds,” says Homer, “So it makes sense to get involved with the claimant and try to facilitate their return to work.”
The earlier the intervention the better and, even when a long deferred period is used on income protection, insurers are increasingly looking for claimants to notify them as soon as possible when they are off sick.
Cost can also be favourable too. “People are often dismayed by the price of income protection but if you tailor it to their needs it can be very affordable, “ says Glen Smith, managing director of Healthcare Partners. He suggests looking not only at what they believe their costs will be but at other factors such as savings they have and their employee benefits package. “Taking these factors into account you can often increase deferred periods or reduce the amount of benefit paid to arrive at premium the client can afford,” he adds. For instance, according to Smith, a 40 year old female clerical worker would pay £27.620 for £1000 or benefit with a thee month deferred period. Increase the deferred period to six months and the premium would fall to £20.62.
Complexity reigns
But while many regard income protection as offering a more complete protection solution, often at comparable prices, the complexity of the product means take-up remains low. “Lenders so sell a lot of Mortgage payment protection insurance type products,” says Graham Newitt, managing director of intermediary solutions at Legal & General. “It’s a simple transaction whereas with income protection there is so much more for them to understand and go through to take it out.”
Some products are likely to mystify the consumer further still. As an example Newitt points to mortgage related income protection products where the benefit is linked to the interest rate, but such products do increase the complexity for the consumer.
Flexible solutions
Insurers are also increasingly bringing together elements of protection to create flexible products that allow mortgage customers to address all their protection requirements with just one product. This has been seen in the income protection arena with the addition of optional unemployment riders on many policies.
Additionally, insurers are bringing income protection benefits alongside the more popular, and easier to understand, life assurance and critical illness products. One of the most recent to make this move is Zurich Life with the launch of its Decreasing Mortgage Cover plan, which enables customers to include income protection alongside life assurance and critical illness cover. Peter Kelly, protection management director at Zurich Life, explains: “We wanted to bring together the best elements of mortgage protection. We also wanted to remove some the complexity surrounding income protection so we have simplified the contract by doing things like restricting the number of deferred periods available and having a simple calculation for the benefits payable.”
