As safe as houses?

Mortgage payment protection insurance (MPPI) is one of the most commonly sold forms of mortgage protection and one that the Government is actively encouraging homeowners to buy as State support continues to dwindle.

According to the Council of Mortgage Lenders (CML), at the end of December 2000, 21.1% of mortgage holders had MPPI ' a total of 2.4 million policies. However, if the Government is to reach its target of 55% of mortgage holders by 2004, there is still a long way to go.

Gareth Riding, marketing director at Payment Shield, says: 'As a nation of homeowners, mortgage borrowers in particular have always been sensitive to the threat of unemployment. It is therefore surprising, if not alarming, to note that of the 11 million mortgage borrowers, only a fifth have MPPI. This low take-up ratio is mainly attributable to borrowers incorrectly assuming that State benefits will act as a safety net in the event of unemployment or disability.'

Falling through the net

Government support to meet mortgage repayments has been reduced, a fact which some consumers are not aware of. Research from the Association of British Insurers (ABI) has shown that one in five consumers believe they can bank on the Government to provide financial support.

However, these people are very much mistaken. Ted Yorke, managing director of MPPI provider Berkeley Alexander, says: 'The Government has already made it clear the private sector must pick up insurance in this group, in other words, people with mortgages. Already payment is not made for months and these rules will continue to change for the worse. People should get used to having this type of protection.'

Jill Elliot, head of creditor development at Norwich Union, says it is important to have some form of mortgage protection, as the employment market can be volatile.

'People's concept of a safe job changes all the time. An example is those working in the airline industry ' they could not have anticipated what would happen,' she says.

MPPI is one of the simplest forms of protection to acquire and Roger Edwards, head of products at Scottish Life, says the advantage of MPPI is that borrowers simply have to tick the box and cover can be arranged with their lender.

But, despite the Government aiming to increase penetration of the product, how viable is it as a form of mortgage protection?

MPPI has been heavily criticised in the past, particularly on the issue of non-payment of claims. But since the introduction of minimum standards for MPPI policies by the CML and the ABI in July 1999, standards have risen.

Raising standards

Riding says: 'Some critics argue that insurers use complicated policy exclusions to avoid paying claims on MPPI. Things have improved dramatically since the CML/ABI initiative and insurers now pay out on over 80% of all MPPI claims.'

The CML/ABI minimum standards initiative is backed by the Government's, Sustainable Home Ownership Project, which also aims to raise awareness of the benefits of MPPI.

Yet while products have improved, the industry still has a lot of work to do. Riding adds: 'If we are to achieve the objectives laid down by the CML and the ABI, much work has to be done by both providers and intermediaries. Many independent financial experts believe the MPPI schemes offered by lenders are still too restrictive and too expensive.'

The benefit period for MPPI policies is seen as a major drawback. While a year's worth of cover may be sufficient for clients absent due to unemployment ' as most individuals will usually have found new employment after five or six months on average ' it may not be enough for clients who are ill.

Edwards says: 'The main drawback is that the benefit is only payable for one year. This is probably fine for the unemployment element, it is the accident and sickness elements which are a worry. If you are off work for two or three years, when the MPPI stops paying out, you could be in as much trouble as if you did not have protection at all.'

Yorke adds: 'The benefit period is an issue. If a person needs income, they could need it for more than 12 months. To be as safe as possible, 24 months seems a better option.'

Laura Shanks, product development manager at Scottish Equitable, says that MPPI traditionally has a poor image due to expense and complexity issues, but adds that it can work well if run alongside an income protection (IP) policy.

'There are alternatives to MPPI although a lot are designed to work alongside it. IP can sit next to MPPI, if the client cannot work due to accident or sickness. MPPI will last for 12 months and then the IP will begin when this stops,' Shanks says.

This works well because benefits are paid immediately and by taking IP with a 56-week deferred period, costs can be kept down.

Although the benefit period for MPPI is shorter than IP, which can provide cover until the borrower's mortgage is repaid, Yorke says MPPI is still a valid form of mortgage protection. He says: 'If you are an IFA and part of your profile is to give the best advice, you are not giving the best advice if you are not offering MPPI.'

Elliot also sees MPPI as a satisfactory means of protecting a mortgage. She says: 'MPPI does the job it is designed to do ' to cover short-term accident, sickness and unemployment.'

The role of intermediaries within MPPI is increasing and also one which has further potential according to providers. Payment Shield says around 40% of all mortgages and remortgages are arranged by intermediaries, equating to approximately 50,000 cases per month.

'If we accept that lenders obtain 5% distribution on MPPI from intermediaries, the potential market is 47,500 new policies per month,' Riding adds.

As a result, this growing market offers massive opportunities for IFAs.

Opportunity knocks

'As an independent intermediary, you have an absolute obligation to protect your clients' interests, and unemployment in particular is a potential risk that can now be covered simply, effectively and at minimum cost. MPPI may not provide a long-term solution, but it will, as a min- imum, protect your client's mortgage payments against unforeseen circumstances,' Riding says.

Applying for MPPI is a relatively simple process, however, Edwards says it is vital for everyone to speak to an IFA who can explain the pros and cons of the product.

Elliot agrees: 'Face-to-face sales work better as you can explain the product. People like thinking about MPPI when they have a financial review with an IFA, which is the perfect opportunity to sell the product.'

If IFAs continue to increase the promotion of MPPI, sales will increase and as the Government continues to reduce the amount of support it provides, the role of IFAs will become even more important.

Providing mortgage protection is a practice IFAs need to adopt according to Yorke. 'It is like a habit, once you have done it, you do not suddenly decide not to. Advisers need to get into the habit of providing protection ' the economy is bordering on recession and if clients do not have protection they could be sorry,' he says.

Looking towards the future, MPPI is bound to adapt to the needs of the consumer, which should result in better products and services offered.

Elliot explains what she expects in the future from MPPI: 'We are seeing customers getting more choice at point of sale and tailoring of needs. For example, the length of term of cover. There are also more options to extend to other bills aside from the mortgage which will continue. Internet sales will increase and we will start to see more specialist products available such as for the self-employed or buy-to-let.'