Must I pay such a heavy price for peace of mind on my home loan?
THE INDEPENDENT ON SUNDAY - 15TH APRIL 2007
I'm soon to move into a new home with my boyfriend and will be completing on a £120,000 mortgage with Chelsea building society.
We're both employed but neither my partner nor I have a company-sponsored sick-pay scheme. For this reason, I'm keen to take out mortgage payment protection insurance and want to scour the market for the best deal as the policy currently offered by my lender is very expensive.
You always advise shopping around but where can I do this for mortgage payment protection insurance? I simply cannot afford to make a mistake and lose my new home.
I'm quite young too (19), and wonder if this would make any difference to the premiums?
AN, by email
First, it's worth looking at the cost to you of Chelsea's mortgage payment protection insurance - insurance that can protect your monthly mortgage payment against loss of income due to ill health or unemployment.
According to the method of mortgage payment protection insurance calculation used widely in the industry, the policy would set you back £4.99 a month per £100 of monthly benefit covered.
Simon Burgess of protection broker British Insurance says this is not the worst deal among banks and building societies on the high street, and notes that the policy does contain an added-value "hospitalisation cover" feature.
But bearing in mind that this cover - like most mortgage payment protection insurance policies - pays out only for a maximum of 12 months, it is certainly a steep price.
Again, as with most such deals, the high premiums are partly down to the built-in cost of commission payable to the lender (Chelsea, in your case) by the insurance provider behind it (Legal &General) if the former sells you the policy.
Independent mortgage payment protection insurance specialists don't have this commission to factor in and charge a lower premium. In your case, you would be able to buy mortgage payment protection insurance for £3.99 per £100 of monthly cover.
However, it's also worth exploring a new "age-related" feature offered by a number of these specialist brokers. Using this protection format, you can slash your costs by a much greater margin still.
You don't give your partner's age but, as you are 19, I shall assume he is 25 or under. If so, you should both be able to obtain age-related cover - from the likes of British Insurance, Enhanced Wealth and the British Insurance Brokers' Association (Biba) - for well under half the cost quoted by Chelsea, and possibly under a third. Even if your boyfriend is in his 30s, the savings should still be huge.
Standard mortgage payment protection insurance, of the type you have been offered by Chelsea, charges all policyholders the same fixed premium regardless of their age. But with the new, alternative cover, the younger you are, the less the insurance costs. And premiums do not subsequently rise in line with your age.
This is arguably much fairer on young people like yourself, because all the evidence suggests you are less likely to make a claim than your older counterparts.
The young have less chance of suffering from ill health and, if they do, they will probably recover more quickly. They also tend to spend less time finding new employment if they lose their job.
The new age-related approach is splendidly straightforward to understand. Premiums aren't affected by your occupation, whether you smoke or your gender.
The cost is determined simply by your age, the rate quoted by the specialist provider concerned, and the amount of monthly cover you select.
These policies will pay out your chosen level of monthly benefit once you have been unable to work for 30 consecutive days as a result of accident, sickness or involuntary unemployment. Payments will be backdated to day one and will continue either until you are able to return to work or for a maximum of 12 months.
However, the new age-related cover, like all mortgage payment protection insurance, does not offer belt-and-braces security.
There are some very significant exclusions. You will, for example, not be covered for voluntary redundancy or resignation, or if you are dismissed as a result of misconduct.
Perhaps most importantly, you won't be able to claim on any medical condition that already exists at the time you start your policy - although this exclusion is waived if you haven't sought medical advice or treatment for the condition for at least two years before the date on which you first become unable to work.
To obtain details of a suitable insurance broker, contact Biba at www.biba.org.uk.
