Protect Yourself
MORTGAGE MAGAZINE - 1ST MAY 2004
Ever considered how you’d pay your mortgage if you lost your job through redundancy or a debilitating illness? Olly Morrison looks at your options
We’ve never had it so good. Unemployment is at its lowest since records began, if the Government is to be believed. We’re living longer than ever and medical breakthroughs are being made every day in the war against killer diseases.
But redundancy, illness and injury remain common intruders into our lives that can sneak up and spoil the party. One in five of us can expect to be laid off at some stage of our working life. The Association of British Insurers (ABI) claims that between 2002 and last year an equivalent of 3000 workers were axed every day. On top of this there are 642,000 people unable to work because of incapacity or long-term sickness. Millions suffer injuries at home, work or on the roads each year. Four in 10 of us will battle with cancer at some stage in our lives, warns Cancer Research. Someone has a heart attack every four minutes, estimates the British Heart Foundation.
Cope
If you find yourself out of a job the Government won’t pay your mortgage. The state will help you out nine months into your unemployment but will only pay interest on the first £100,00 of your home loan.
Our savings are often inadequate to cope with periods without unemployment. Half of us have less than £600 in savings, says the Institute of Fiscal studies. A third have none at all. Most of us are in the red. “The average household debt is around £7,000 excluding mortgage payments,” say Malcolm Tarling from the ABI. “Most homeowners will have insufficient savings to meet the mortgage payments if they become unemployed or suffer an accident or illness that prevents them from working and earning.”
This is why nearly 40 per cent of new mortgage borrowers protect themselves with mortgage payment protection insurance. Mortgage payment protection insurance, also known as accident, sickness and unemployment (ASU), is a cheap and easy way of getting your mortgage paid should you find yourself out of work through redundancy or illness.
What you’ll pay for your policy depends on your monthly mortgage commitment. Mortgage payment protection insurance typically costs between £2-5.50 per £100 of cover. So if your mortgage sets you back £500 a month and the premium is £5 per £100 Mortgage Payment Protection insurance would cost £25 month. You have the option with some lenders to pay more to cover yourself against other costs such as investments, utility bills other loans.
Also affecting the policy price is deferment period you choose – the period between losing your job and making your first claim. You can choose between 30 and 60 days.
The longer the deferment period the cheaper the premiums.
Most mortgage borrowers can get hold of mortgage payment protection insurance quite easily. It used to be tricky for the self-employed and contract workers but policies have adapted. You should bear in mind, however, that you will be excluded a pay out if you knew you were going to be made redundant when you took the policy. Neither will you be protected if you left you employment voluntarily or were sacked.
Mortgage payment protection insurance is usually bought at the same time as a mortgage. But you’ll be paying over the odds if you get it with your mortgage lender. Insurance firms offer the most competitive deals. An exception is the Market Harborough Building Society which offers it at a rate of just £1.75 per £100 of cover. However, it’s only available to its own mortgage borrowers.
Safety Net
Mortgage payment protection insurance is being heavily promoted by both lenders and the Government, who don’t want to see a return of the mass repossession that occurred because of high unemployment in the late 80’s and early 90’s. But it is occasionally criticised. It is short-term and will only cover you for 12 months, for example, but policyholders are often under the impression it will cover their mortgage until they find another job, even if this takes longer.
If you want long-term cover against being unable to work due to illness, accident or injury then you can take out an income protection policy. This will provide you with money every month up to your retirement age should you be unfit to work for that long. You don’t need a mortgage to get this policy as the amount the insurer will pay out each month depends on your salary.
You apply for insuring a percentage of what you earn. The maximum you’re normally allowed is 60 per cent of your pay packet but this will be tax free so not that different from what you walk home with every month. The less the percentage you claim for then the cheaper the premium. Just like mortgage payment protection insurance the policy will be cheaper still if you opt for a long deferment period. You’ll normally set this at the period when your employer will stop giving you sick pay – which varies wildly depending on your employer. You can’t receive sick pay and insurance pay outs. You can ask for a deferral period of up to two years.
Self-employed people and contract workers, while they have no problems in receiving a policy, are likely to have a lower deferment periods and accordingly slightly higher premiums as they do not receive company benefits such as sick pay.
Income protection will cover you against any condition that stops you working. As with mortgage payment protection insurance you will be refused a payout, though, if you were aware of your illness or injury when you purchased your policy. Lenders can check these details with you GP. Policies won’t include ill-health caused by self-inflicted injuries.
Ailments
The vast majority of claims are muscular related, such as bad backs. And most policies will also include mental health problems. In fact, stress related disorders such as anxiety and depression are the fastest growing type of claim. Things are that bad that people in pressure-prone professions – teachers and police officers particularly – are finding it hard to get income protection. Norwich Union, for example does take them on – but the policy will exclude being unable to work because of a stress related complaint.
Workers in physically dangerous jobs can also expect a hard time getting protection. If they do the premiums will be high. This includes oil rig workers, pilots, professional drivers and members of the building trade. Interestingly the number one group of people who have to pay an absolute fortune to receive income protection are pop stars, who, because of their chaotic lifestyles, are especially liable to suffer ill health. This shouldn’t be confused with a hedonistic lifestyle. Remember: an income protection policy won’t pay up if you are unable to work because of illness caused by alcohol or drug misuse.
Apart from our job, you age and health history are also factors, as well as your lifestyle. Drinkers and smokers will pay more for their policy than their clean living counterparts. And be warned: in terms of insurance there is no difference between the wheezy 60-a-day puffer and the man who lights up a celebratory cigar at weddings.
“There’s no such thing as an infrequent smoker,” says Kevin Carr, senior technical adviser at insurance broker Lifesearch. “Even if you have worn a Nicorette patch for the past year you are considered to be a smoker by the insurer.”
If you’ve lit up in the last year you’ll pay more for your income protection insurance. If your insurer finds any evidence (probably from your GP) that you’ve lied about smoking your case will be null and voided.
While smokers pay more, so do older customers and females. “Women live longer than men,” explains Simon Burgess from insurance broker Burgesses, “but they tend to live unhealthier lives and make more claims.”
Lengthy
Once you start getting the benefit it can last for years (claimants receive payments for five years on average) – providing, of course, you are still unfit to work.
Insurers have medical panels to check this and your case is usually reviewed every six months. Insurance firms want claimants to get back to work as soon as possible to limit what they fork out and they have become increasingly proactive in helping people re-enter the job market.
If you are stuck on an NHS waiting list for an operation, for example , they may pay for you to get it done privately. They might pay for you to retrain. A builder unable to lift heavy loads could retrain as a locksmith, for example. It may make up for the shortfalls in your income while your new business grows. Your insurer may install IT for you so you can work from home. Or it might pay for your physiotherapy. Bright Grey, give customers free gym membership.
Carr says claimants appreciate the help. “Most people with income protection tend to come from more professional jobs and tend to want to get back to work as quickly as possible,” he says. “And it makes sense for the lender to help them do this.”
So if you want to safeguard yourself against the trauma of redundancy, serious illness or injury if they come knocking on your door when you least expect it, these types of insurance policies make sense too.
