Most people will be aware that the Government has been realigning State benefits and that the support it will offer to mortgage borrowers has changed.
Fewer people, however, know the details of these changes. For example, that they will have to wait nine months (or 14 if the recent proposals in the Government's Green Paper on housing are adopted) after becoming unemployed before they are eligible for State help with their mortgage repayments on mortgages. Or that 70% of people will not qualify for assistance even if they try because either the capital value of their loan is greater than £100,000, their partner works more than 24 hours a week or they have more than £8,000 in savings. Few people also realise that they are five times more likely to be off work for a period of six months or more through sickness than they are to die before their 65th birthday.
An insurance policy that pays out on sickness, disability and unemployment therefore has an obvious role to play. But the take-up of these policies has been slow, either because their benefits are not being explained to borrowers or because they do not represent value for money.
Historically, mortgage payment protection insurance (MPPI) has received bad press as a result of strict exclusion clauses, poor settlement records and ambiguity of cover. But in July 1999, the ABI and CML jointly launched a benchmarking specification for MPPI aimed at removing ambiguity from the equation. They defined the most basic level of cover against the risk of accident, sickness and unemployment, with the intention that borrowers will only be offered a policy that meets or exceeds these standards. Both parties announced that they were committed to raising the level of public awareness and aiming for the Government's target of increasing the take up of MPPI to 55% of all mortgage holders by 2004.
One year on, figures released by the CML show that in the first six months following the launch of the baseline specification there has been a 9% increase in the number of mortgages with a policy in place. This represents an increase of over two million homebuyers, and means that 19% of the 11 million outstanding mortgages in the UK are now covered by an MPPI insurance policy.
Financial security
But what are the benefits of this type of contract? Lesley Russell, communications manager at GE Financial Insurance, which manufactures products for individual lenders, says that MPPI is a way of ensuring financial security when a lengthy period off work is taken. It provides peace of mind to know that a person's most valuable asset is covered while they are returning to health or looking for work.
MPPI is available to employed, self-employed and contract workers as long as they meet certain criteria, but they may be underwritten differently to meet their individual requirements. Claims will be paid if the borrower becomes unemployed or disabled and unable to work. Benefits will usually be paid out after a period of 60 days, although some policies will pay out after 30 days, for which the borrower might have to pay more.
The advantages of MPPI are self-evident. A mortgage is probably the largest financial commitment anyone will undertake, but State assistance for people who find themselves unable to meet that commitment due to sickness or disability is dwindling.
Derek Mauri, managing director at Jackson Lee Underwriting, says: "If you have cause to claim, then it is an absolute lifesaver. In 12 months you can take stock of your life, maybe move to a smaller house with no mortgage or even retrain in another career."
Consumer research
GE Financial Insurance recently undertook some consumer research and found that the majority of people would only have enough savings to allow them to pay their mortgage for three months. The same research found that the average claim for unemployment lasts for 310 days and almost 400 for a disability, so without cover, most peoples' homes would be at risk should the worst happen.
Russell says the introduction of the benchmark product last year has significantly increased the take-up of MPPI. Nevertheless, she believes that there is still a lot of confusion among borrowers as to the limitations of State benefits, something which needs to eventually be addressed if the Government is to reach its 55% sales target.
One of the claims that is levelled against MPPI is that it is an expensive product, but Russell argues that since the introduction of the benchmark product, the price has actually fallen and for a mortgage of £80,000 the average monthly premium is between £50-£60. "I would argue that that is not a hell of a lot to spend on securing your home," she says.
As tables two and three show, the cost of cover varies widely. For a policy with a 30-day deferred period, cover can be typically purchased for around £5 for every £100 of benefit. Cover from Britannia Building Society is most expensive at £7.14, but with a benefit period of 24 months rather than 12, it is not as uncompetitive as it might first appear. For a 12-month benefit payment period, Legal & General and Lincoln at £6.95 are the most expensive, followed by Newcastle Building Society at £6.19. The cheapest products from lenders were Chelsea Building Society at £4.73 and Yorkshire Building Society at £4.83.
Away from the lender market, cover can be purchased from as little as £3.95 per £100 benefit from Kew Insurance Services or £4.25 from Goodfellows Securityfirst, an internet-based product. However, when agent commission is included prices begin to look a little less competitive. Goodfellows' intermediary product, Freestart is identical to Securityfirst but costs £5.75, although it does offer six months' free cover.
For a customer with a monthly mortgage payment of £500, Securityfirst would cost £21.25 a month, while Freestart would cost £28.75.
Ian Beggs, senior press officer at the Halifax, suggests that its price of £6.06 per £100 is better value than meets the eye. He explains that it automatically sets the amount to cover 125% of the monthly mortgage repayment, because mortgage repayments are not the only monthly outgoings. "Effectively, people have got a buffer which allows the policy to cover not only the mortgage but some additional expenditures," he says.
Beggs adds that since the launch of the benchmark product, nearly half of its new direct borrowers are taking out this type of policy when they take out a Halifax mortgage, compared with 25% a year ago.
Alternatives to MPPI
However, Dale Tranter, protection researcher at IFA network Countrywide, says that MPPI may not always be the best route for homebuyers and that if people can afford income protection (IP) to cover mortgage repayments then they are probably better off as MPPI only pays out for one to two years. In many cases it will also be easier to claim under an income protection plan.
"With income protection, cover will be provided on an own occupation basis, which means the benefit will be paid if the claimant is unable to do their job, rather than 'any associated' job. Virtually no MPPI providers will offer this," says Tranter.
As a result, when money is tight it may even be in the client's interest to arrange an IP policy with a limited benefit period, say two years, as an alternative to conventional MPPI.
"On top of this, there are no rate guarantees on MPPI, so the providers have you over a barrel unless you start looking for cover from scratch if rates rise," he adds.
Relative to the cover provided, mortgage income protection looks much better value. Tranter says: "MPPI is over-priced and although rates have come down in the last two to three years, you can still pay as much on some MPPI policies as you can on some income protection policies with free-standing unemployment cover on the side."
However, Simon Burgess, managing partner at Goodfellows, says that this is not always the case - that it may be true for a male, non-smoking accountant, but certainly would not be for a female smoker with a manual occupation.
He says: "For most people there is no substitute for income protection, but most people cannot afford it."
But Kevin Pearce, protection marketing director at Zurich Life, is concerned that MPPI policies may lure borrowers into a false sense of security.
He says: "When people buy MPPI, they believe that they are protected against accident and sickness. To a certain extent that is true, but only if their condition meets the conditions of the policy. People need to look hard at their policy to see what is claimable and what is not, especially if they have a pre-existing condition, as this is what is most likely to cause a claim."
He adds: "At least with income protection the policy is underwritten. There may be a rating for a pre-existing condition, but at least it is included. Or if it is not included, then the policyholder is aware of this upfront."
However, Robert Guy, technical director at John Charcol, says that while MPPI may not be the perfect product, it should not be written off. He believes that the product does have some structural problems, but for some people it is the only product they are likely to buy and it is certainly better than no cover at all.
He adds: "The big problem with MPPI is that cover can be withdrawn with three months notice - if the risk becomes too uncomfortable then the insurer has a get out clause."
Personal circumstances
The value of an MPPI policy will ultimately depend on the client's personal circumstances. Guy says that for people in occupational classes one or two MPPI can be expensive, but for those in, say, class four, income protection will be extremely expensive. So for them, MPPI can offer reasonably good value by comparison. Burgess agrees and says a large proportion of borrowers cannot obtain IP at a competitive price.
He says: "People with occupational classes three and four are often excluded from cover, there are locational loadings, smoking loadings and women are penalised for their gender."
Recognising the flaws in MPPI, a number of life companies have entered the market with income protection-based contracts.
Scottish Provident, Legal & General, MGM Assurance and Zurich Life offer a range of plans that offer long-term mortgage protection, paying out on sickness or disability for the length of the mortgage term with an additional 12 months of unemployment cover. The Scottish Provident approach is built around its Self Assurance range that enables clients to mix and match their protection.
Roger Edwards, product marketing manager at Scottish Provident, says: "Unlike an MPPI policy, Self Assurance allows people to have all the mortgage protection they need within the same plan. They can select from the menu virtually any combination of benefits they want. For example they could protect the mortgage by, say, having a 25-year death benefit and a 25-year critical illness benefit and MPPI cover for 25 years. They could also have an extra lump sum for family protection."
But the actual MPPI aspect of the cover is different to traditional MPPI contracts, which is usually charged at a rate per £100 of benefit.
"Because the contract is based around a life policy, we took the individual components of MPPI and looked at their long-term insurance equivalents. If you look at the accident and sickness aspect of MPPI then it is effectively the same as income protection, so we built it into the menu but with the benefit limited to cover the mortgage.
"The benefits of this are that MPPI tends to just pay out for one year and then the policy effectively finishes. With our policy, if a client becomes a claimant and their illness does not clear up after a year then payments will continue until they get better or until the end of the term," Edwards says.
In addition to its MPPI contract, Legal & General also offers a Mortgage Payment Insurance contract that is based on an income protection contract with an unemployment rider benefit. Length of benefit period aside, Mortgage Payment Insurance does have a number of advantages over MPPI in terms of future guarantees and on flexibility.
Richard Verdin, housing marketing manager at Legal & General says: "On MPPI, clients choose the level of cover they need, but Mortgage Payment Insurance has a link to interest rates moving in line with every 1% change in the Halifax's standard variable rate."
As a result, there is less chance of benefits failing to meet the monthly mortgage payment if interest rates rise. A choice of deferred periods also means that policyholders can dovetail their protection to their own circumstances.
"Under the CML/ABI benchmarks, MPPI plans must offer an eight-week deferred period. But some people may get sick pay from the employer for say, six months, so what use is a fixed deferred period?" Verdin says.
Mortgage Payment Insurance consequently offers a choice of four, eight, 13, 26 or 52 week deferred periods.
Rehabilitation bonus
The Mortgage Payment Insurance policy also has the added bonus of a rehabilitation benefit. This means that claimants can continue to receive their benefit for three months following their return to work allowing claimants to return to work on a part-time basis without worrying about the mortgage. So by comparison, Mortgage Payment Insurance appears to offer considerably more value than MPPI, and when cost is compared it seems quite hard to justify the prices charged for MPPI.
Take, for example, a non-smoking male, 30 next birthday with a £70,000 mortgage which he pays off at £435 a month. Short-term MPPI cover from Legal & General with an eight-week deferred period would cost £27.83 a month. This would cover the mortgage payments for 12 months in the event of accident, sickness or redundancy.
Alternatively, if he wanted longer term security he could take out Mortgage Payment Insurance with an unemployment rider benefit from Legal & General, again with an eight-week deferred period. This would mean that if he was sick or disabled, benefit would be paid until the end of the mortgage term for just £29.91 - just £2 extra per month for long-term cover.
Tailored protection
Zurich Life offers Comprehensive Mortgage Insurance, a policy which, like the Scottish Provident product, allows clients to tailor protection by offering a 'pick-and-mix' of critical illness cover and life cover that will pay off the mortgage on claim, as well as income protection and unemployment cover that will cover mortgage payments.
Such comprehensive protection clearly does come with a substantial price tag, but Pearce says that homebuyers should not always go for the cheapest option.
"This type of product is a lot more expensive than MPPI, but if you opt for a cheap and cheerful product the chance of claiming is slimmer and even when it does pay it will only do so for a year," he says.
MPPI has certainly taken a knocking in recent years, and while it does have a role in the mortgage protection market it cannot be described as comprehensive, with a benefit period limited to one year. So the introduction of mortgage income protection policies has to be welcomed. But they are not the panacea the market needs. Although benefit payments could last the length of the term, many borrowers in high-risk occupations or with less healthy lifestyles could be priced out of the market, if they are accepted at all.
So if the Government is to succeed in its bid to encourage homebuyers to protect their mortgage, work needs to be done on developing affordable and comprehensive cover for all homebuyers
