Unforeseen circumstances – Nobody expects the worst but what if it happens?
MONEY MANAGEMENT - 1ST AUGUST 2002
Payment protection insurance and mortgage payment protection insurance sometimes known as accident, sickness and unemployment cover, is currently being hyped up as the next mis-selling scandal but, as with earlier such ‘scandals’, there is more to the subject than will easily fit into a tabloid headline.
Which? Magazine has recently conducted a survey into how payment protection insurance is sold with personal loans and the shocking finds could as easily be applied to mortgage payment protection insurance ‘sold’ with mortgage products. The single quotes above are not for affectation because, in the Which? Survey, 58% of quotes obtained automatically included payment protection insurance with banks and other big high street lenders especially guilty of this assumed close. However, to say that some people have been mis sold a specific product is not to say that they have no need for protection. People with mortgages need cover for a range of risks and, for most people, insurance of some kind remains the likeliest provider of that cover. To understand current concerns about mortgage payment protection insurance, it will be useful to view the whole picture.
Protecting against the worst
There are a number of ways in which protection can be effected to ensure either that the mortgage is cleared or that payments can continue when unforeseen disaster strikes. However, be cause people, their circumstances and their needs are very individual, the type of packaged approach adopted by some lenders in this field is wholly inappropriate, In particular, at the top end of the market, ABC1 clients may have resources to fall back on; second time or subsequent buyers will almost certainly have a lower than average loan to value ration albeit for a higher than average borrowing amount reflecting their relative financial security. Further down the market, C2DE and first time buyers may borrow less than average but will have a higher than average LTV reflecting their relative financial fragility. Their protection ought to take this into account but many lenders simply offer the same deal to all comers. IFAs and brokers are better placed to consider cover and packages appropriate to individual needs.
To protect against death there is decreasing term (the traditionally understood ‘mortgage protection’ vehicle) level term and whole of life. On the face of it, decreasing term may seem the cheapest option but cheap is not always best. The problem with decreasing term is that the cover reduces in line with the anticipated capital reductions in a repayment mortgage and so will be pretty useless when a new mortgage is taken.
However, if a borrower takes level term and then embarks on a new repayment mortgage, the policy can be kept in place at its original rate and cover only needs to be negotiated and underwritten for additional borrowing. Borrowers need to be vigilant as falling term assurance rates may make it cheaper to start a whole new policy (other factors such as health being equal) if a new mortgage is taken within a few years of the first. Whole of life is the most expensive option but for young people today with foresight and resources will mean that, even after the mortgage has been repaid, they can still add value to the estate passed on at their death or can ensure that money is available to fund future inheritance tax liabilities – a very real likelihood on estates including houses at current values.
Illness and disability are more likely threats to a mortgage and yet worryingly few people make provision against that possibility. Of all 35 year olds today, 20% will be off work for six months or more through illness or disability before they are 50 and yet, according to a recent survey by UnumProvident, income protection insurance was a priority for just 4% of respondents. The attitude may be more positive among mortgage holders regarding mortgage payment protection insurance. There are two clear but not exclusive choices for dealing with such a situation. Critical illness cover, whether taken as a stand alone policy or as part of a life insurance plan, will pay out in the case of a life threatening condition although buyers should be careful that they have adequate cover for death as well as critical illness; critical illness claimants are unlikely to be insurable after the claim.
The other cover for illness or disability is permanent health insurance. Unlike Critical illness, permanent health insurance pays and income until retirement and will cover against conditions such as stress and back injuries, the commonest permanent health insurance claims. However, permanent health insurance policies will only start paying out after a specified period and shorter that period, the greater the cost of cover. Also permanent health insurance policies vary much more according to occupation than do critical illness plans.
The other real risk is of redundancy and unemployment and it is the latter about which people should think when deciding whether they need cover. While somebody with a very secure but unskilled job in the only factory in town may think that they have no need to redundancy cover, the real risk that they face is not the redundancy itself but whether they will be able to find replacement work. On the other hand, somebody in a high turnover but high demand job within a volatile sector (many IT jobs are like this) may well face risk of redundancy every few years but will have no problem getting a new employment and so will be little affected by it.
There is also a growing band of products call accident, sickness and unemployment and now more commonly called mortgage payment protection insurance. It is in this group and in the phi policies that some borrowers are being poorly served by lenders who simply sell them the product that they have available without any reference to individual circumstances.
The results can be disastrous where, for instance, an applicant has a pre-existing condition which later causes health problems that trigger a claim on a phi or mortgage payment protection insurance plan. Insurers on discovering that the condition has a pre existing roots will refuse to pay out. But all too often the lender has simply included the plan in the borrowing package without any proper fact finding and the first that the client know of a problem is when the claim is rejected.
Also broker Burgesses shows the average mortgage payment protection insurance premium for the top 10 high street lenders is significantly higher than the average mortgage payment protection insurance premium for the top 10 brokers in the market. Of course some clients are happy to pay more the convenience of the one stop facility offered by high street lenders, but many are not even aware that they could refuse the lender’s policy and shop around for a better deal. Incidentally, because most claims end within a year, two year cover for mortgage payment protection insurance costs very little more than for one year so might be worth the extra for peace of mind.
Not a simple matter
This really is too complex a market for the simple over the counter approach of a high street lender with a limited product range and not necessarily offering the best value. For instance, while self employed people have very little use for unemployment, which they can only claim if there is no business available phi is a very important cover for them.
Equally, where a borrower is older and/or has a high level of equity in the home, it may be better for them to choose to downsize if either their health or their job goes. And some people will borrow considerably less than their facility on a flexible mortgage or even overpay that mortgage in good times in order to self insure themselves against difficult times by taking payment holiday. Not all flexible mortgages will allow payment holidays. When times get tough, so read the small print! Some will even have sufficient wealth to be able to weather most employment or health storms.
While intermediaries such as brokers or IFAs will be able to assess which, if any, of the above circumstances applies to the client in front of them, high street lenders’ tied agents seem less able to distinguish between various needs.
An intimation of the further order.
High street lenders, including banks, seem to be the worst offenders in this potential mis selling case. These are the same institutions whose schmoozing has led the Government and FSA to recommend that the clarity of polarisation be replaced with an arrangement that will allow banks and other big high street institutions to hide their true relationships in a fog of definitions. As Sheila McKechie, direct of the Consumers’ Association said, “The big banks have ripped us off for years in the current account, savings, mortgage and credit card market…” If the case of mortgage payment protection insurance cover is anything to go by, giving them a free hand will not improve things and could even unfairly tarnish the reputation of a number of good and useful protection products.
Covering unforeseen circumstances is what insurance policies are made for and it is that, rather than maximising the value of a customer base, for which they should be sold.
