Mortgage payment protection insurance (MPPI) is constantly criticised for its failings in comparison to income protection (IP). But what advantages does the product have and in what instance is it a more suitable product than IP?
Market views
Ronnie Martin, Adalta Consulting
The life protection sector seeks to compare MPPI products with IP. However, such comparisons are not valid and could be damaging since the underlying products are structured very differently. MPPI is for the mass market while IP is a fully underwritten prestige market product.
How IP can become a mass market proposition, i.e. one that retains its prestige product status while having wider market appeal - is the subject of constant debate.
In the meantime, MPPI is sold because it is generally lower in cost for customers while distributors frequently offer the carrot of the initial months free of charge. Emotion is a strong driver for all protection purchases. When buying a house, fear of future unemployment is high, and MPPI leads on this benefit, unlike IP, with its generally expensive unemployment option. Waiting period choices on MPPI are also straightforward and MPPI alongside life and critical illness (CI) as a protection bundle can be simpler for a customer without the issue of where IP and CI may or may not overlap.
The fact that MPPI might have exclusions and be payable for a limited period is accepted and an ABI survey in 2001 found that claimants under payment protection policies were overwhelmingly satisfied with both payout and process. The recently announced FSA investigation could throw some fresh light on the debate.
However seeking compatibility rather than comparisons of MPPI and IP could prove more valuable.
Kevin Carr, LifeSearch
The majority of criticism directed at payment protection insurance is valid in my view. The product is often over-sold, over-priced, deeply flawed and accounts for more than 15% of some high street mortgage lenders' total profits.
That said, there are two situations where MPPI still has a place in the market. The first, is when sold in addition to IP. In this situation, MPPI would be sold alongside a 12-month deferred IP policy, so that the IP benefit would kick-in if the client was still unable to work when the MPPI benefit ceases.
Secondly, advisers need MPPI as an alternative option if IP is not suitable for a specific customer's needs. Because MPPI is a 'one price fits all' policy, issues such as occupation, sex, health and family history can occasionally make MPPI more suitable.
Most importantly, however, any adviser discussing MPPI, without making due reference to alternatives such as IP, is clearly not treating their customers fairly under new regulations.
Steve Clowes, Millennium Insurance
The two products are compatible and we should not try to argue one is better than the other. IP has traditionally been sold by IFAs, and MPPI by lenders, but is now available as a standalone product sold mainly by mortgage brokers.
Each has its place, and it depends on the client's demands and needs at the time. The priority for someone who has just committed to a £500 per month mortgage is to pay that mortgage, or risk losing their home if they cannot work.
The main advantage of MPPI is that the policy is straightforward and easy to understand and explain to clients. The policy is also portable, so when clients re-mortgage it goes with them. Benefits are paid direct to the client, not the lender and there is often the choice of full accident, sickness and unemployment (ASU) with 12 or 24 month benefits, or AS or U. As an added bonus, MPPI benefits are (currently) exempt from Tax or DSS assessment
Personally, I think that perhaps IP to age 65 with a 13-week deferred period is not top of a new mortgage borrowers buying priority - not just yet anyhow. But if an MPPI policy is sold properly first of all, this will naturally lead to a conversation about what happens if the client is off work for a longer period.
Paul Bennett, AXA
The drawbacks of MPPI are well-documented. It offers only short-term cover, does not provide a customer with adequate overall protection if they become unable to work, and it is underwritten at the point of claim not the point of sale - so a customer could find their claim overturned if they have a pre-existing condition.
However, the product does have a place in the market because there are ways in which it can meet customers' needs. It is usually cheaper than IP, so for customers on a tight budget who cannot afford full IP, it is a useful option. The fact that it offers cover for unemployment is a big advantage over IP too. It is also straightforward to apply for, both for the customer and the adviser.
One thing that must be pointed out is that it does not need to be a case of either MPPI or IP. There are ways of finding middle ground. It is just a case of finding the best solution.
For example, mortgage income protection, which, like MPPI, is tied only to the mortgage but offers long-term cover like IP. It is also possible to combine MPPI with IP. For example, by selling MPPI on a short deferred claims period together with IP on a 52-week deferred claims period.
This is cheaper than IP on a four week deferred claims period and gives the customer more comprehensive cover than MPPI alone.
