Demand for Mortgage Payment Protection Insurance is still dwindling, but a new philosophy on debt waiver products could rejuvenate the market. Fiona Murphy reports.
It's a year since I started writing for COVER, with my first feature being a survey on how the Mortgage Payment Protection Insurance (MPPI) market had fallen from favour in recent years. So, has much changed since I wrote ‘MPPI: Caught in the crossfire' 12 months ago?
Unfortunately not, because MPPI is still tarred by the mis-selling scandal of the Payment Protection Insurance (PPI) market, with consumers still believing the products are one and the same.
In simple terms, PPI was designed to help people to pay off loan commitments or credit card repayments if they fell ill or became unemployed. They were often sold with a credit card, loan, or mortgage arrangement. But banks were heavily criticised for mis-selling policies to people who did not actually know they had taken out cover, were ineligible to claim, or did not understand what they had taken out.
However, it is fair to say that not all PPI-type policies are the same or were mis-sold. Take MPPI, which covers mortgage payments for people unable to work due to accident, sickness or unemployment. In exchange for a monthly premium, MPPI policies pay claimants a set amount each month to cover their mortgage repayments. Policies pay claimants anywhere between 50% and 75% of their gross monthly salary. In addition, with these policies the maximum benefit period is usually either 12 or 24 months.
The products may look similar on the surface, but the fundamental differences lie in how they pay out and how they have been sold to consumers.
Shying away from cover
However, consumers and lenders are still ‘shying away' from unemployment cover, according to research from British Money released in April.
Simon Burgess, director of British Money, commissioned online market research firm Usurv to poll 1,000 new mortgage borrowers, asking why they had not purchased unemployment cover. Half of the respondents (46%) said it was not discussed or offered to them by their lender, so they didn't know it was available.
Just over one-quarter (27%) thought it unnecessary because the state would protect them if they lost their job, and 24% would never buy the product because it has a tarnished reputation. The remaining 3% had bought cover, in line with previous survey findings.
The fact that MPPI continues to dwindle is reflected in the number of plans in the tables we have included in the feature. The only two household names to offer MPPI-type policies are LV= and Legal & General, which is symptomatic of how most insurers no longer take it seriously.
However, perhaps in response to such widespread attitudes, in its May/June 2014 newsletter, the Financial Ombudsman Service (FOS) clearly set out the difference between PPI and MPPI. In addition, the consumer watchdog highlighted it was less likely to uphold an MPPI claim than other PPI claims.
Richard Thompson, lead ombudsman for PPI, explained this was because the FOS found "the MPPI sellers provided better information and quality of advice than sellers of other forms of PPI".
The FOS also found MPPI policies offered "better value" and were more flexible than other types of PPI.
Thompson said: "It's true that the overall uphold rate for MPPI is lower than for other forms of PPI. But just because we find MPPI policies generally represent better value for money, and are generally better explained to customers, doesn't mean that things don't go wrong. It's true that the overall uphold rate for MPPI is lower than for other forms of PPI.
"We also see cases where consumers weren't told that the policy was optional, thinking instead that it was part and parcel of the mortgage. It's in circumstances such as these that we tend to agree MPPI has been mis-sold."
The IP proposition
Another reason lies in the fact that income protection (IP) is perhaps a far more suitable proposition for the majority of clients.
Tom Conner, director at Drewberry Insurance, explained: "Supposing you have a young couple who have bought their first home, the mortgage broker or bank might have recommended MPPI. We tend to look at things more holistically. We ask if one of you were to pass away, how would you cover the mortgage? We would say, let's look at life insurance. If one of you were to fall sick and your employer does not provide IP through work, you should look at protecting your income as a whole, not just the mortgage.
"The mortgage may be the largest expenditure, but you also have bills, so we would look at implementing a decent IP policy each. The term of the policy might run to the end of the mortgage, but it's looking at covering their essential outgoings. If they're worried about unemployment, there's not much choice apart from looking to an MPPI plan, because IP just covers accident and sickness. It depends what's happening with the economy, and I think people are less worried about unemployment than they were a few years ago."
However, Conner added: "With MPPI, if it's arranged correctly, it's still a worthwhile policy to have if people are concerned about that area of risk.
"With wanting to cover against accident or sickness, you want to be looking at IP for a number of different reasons. IP policies tend to pay out for a year, whereas if you look at LV='s average payout for an IP policy, it's seven years; with Aviva it's nine years. For redundancy, you would think someone would have a good chance of getting into work within a year."
Debt waiver
However, while IP is the policy of choice for people seeking coverage against illness, things could be looking up for the MPPI market. A new generation of plans, which we can perhaps loosely put under the MPPI umbrella, have the potential to encourage people to take out policies to protect their mortgages against unemployment or sickness.
Most recently, Cuna Mutual launched the UK's first-ever mortgage waiver product for building society National Counties under the brand The Family Building Society. It gives borrowers built-in protection from unemployment.
On releasing the product, National Counties said it hoped the Family Mortgage would make it easier for young adults to get onto the property ladder while also providing them with up to six months protection should they lose their job through no fault of their own.
National Counties will join a group of firms to have launched a waiver feature. These include Peugeot and Citroen in the motor market, and Hitachi Capital
and a number of credit unions in the lending market.
