Proceed with care when selling payment protection insurance
MORTGAGE STRATEGY - 30TH MAY 2005
I write to response to recent comments by Chris Cummings, director of the Association of Mortgage Intermediaries, who blames the regulator for advisers’ reliance on mortgage payment protection insurance.
I agree with Cummings’ statement that “advisers should not simply attach mortgage payment protection insurance to mortgage sales as a matter of course and should consider all the options available.” If nothing else, as a way to boost income – particularly as both income protection and critical illness attract commission rates of up to two years in premiums which will swell the bank balance nicely (albeit possibly temporarily).
As an advocate of properly sold, low cost mortgage payment protection insurance, I am compelled to sound a note of caution which advisers must consider if they don’t want to breach their duty of care to ensure clients have sufficient financial resources to meet their mortgage repayments at all reasonable times, including periods of unemployment and disability.
Income protection is a brilliant product when it provides own occupation cover and a nominal excess. It does however, have limitations including the fact that it is expensive (commission is clearly a factor) and insurers cherry pick healthy client. If you are a woman, a smoker, gay or in manual work you will pay extra or you might not get cover at all. The major problem here, however, is that claims payments are made directly to clients, whereas mortgage payment protection insurance payments are paid to lenders. Accordingly, income protection clients become automatically ineligi8ble for mortgage income relief from the state. This can cost an adviser dear. I know of at least one firm that is being sued for not fully explaining this fact to a client.
Critical illness has always been a brilliant product for the life insurance industry due to the vast commissions and fees on offer. If, however, an adviser fails to fully explain the complicated limitations in cover, one can expect action regarding negligence. I trained as a barrister but make a good living supplying mortgage payment protection insurance, whereas many of my fellows simply make a good living suing advisers.
Accordingly, if you don’t wish to risk being sued, embrace the reasonable FSA regulation and sell, where appropriate, the policy (i.e. mortgage payment protection insurance) that fulfils the basic duty of care requirements.
By all means, advisers should consider offering additional cover income protection. A 12 month excess, for example, often offers excellent value. But don’t offer a substitute without careful consideration just because this alternative pays more commission.
Payment protection is an untapped market for IFAs who can claim a share of over £5bn in annual commissions, but safety first must be their watchword.
