The poor market penetration of mortgage payment protection insurance has galvanised the Council of Mortgage Lenders (CML) and the Association of British Insurers (ABI) into publishing minimum standards for the product in an attempt to raise consumer confidence and increase sales.
But why is there such a need for borrowers to take out insurance – and why are they so reluctant to do so? The first point to note is that need for this type of cover has increased significantly in recent years as a result of government cutbacks in the level of State help. Rules introduced in October 1995 have made it more difficult for borrowers to get help with paying their mortgages if they are unable to work. Anyone who took out a mortgage after October 2, 1995 receives no assistance with their mortgage interest for the first 39 weeks of a claim. After that period, the full amount of mortgage interest will be paid, but only at a standard rate of interest which maybe more or less than they are actually paying.
Anyone who took out a mortgage before this date gets no help with housing costs for the first eight weeks, followed by 50 per cent of interest for the next 18 weeks and 100 per cent of interest thereafter. However, it is also important to realise that help is only available with mortgage repayments if the claimant is deemed to be eligible. This means the claimant must qualify for income support. If the claimant works 16 hours or more a week or a partner works more than 24 hours a week or if they have savings of over £8,000, this is impossible. There is also an upper limit of £100,000 on the size of the mortgage which income support will cover – although if the mortgage is larger than this it may be possible to receive assistance on the first £ 100,000.
Industry estimates suggest that around 55 per cent of mortgage borrowers need insurance, while only 30 per cent of new borrowers choose to take out a policy. The remaining 45 per cent of homeowners are thought not to need cover either because they have already repaid their mortgage, have got a good level of income protection insurance or have adequate savings or other assets.
Furthermore, of the 50 per cent of mortgages that are sold directly by lenders, between 30 per cent and 50 per cent are sold with some kind of insurance policy, whereas of the 50 per cent that are sold through intermediaries, only around 5-10 per cent are sold with insurance.
But, given the clear need for this product, why isn’t more of it sold? Perhaps the over-riding reason is a general suspicion that, should a day come when the policyholder needs to claim on the policy, the insurer will find a reason for not paying up. This explains the introduction of the new minimum standards.
Sue Anderson, head of external affairs at the CML, says: “In a nutshell, not enough people are taking out these policies and one of the reasons for this is the belief that insurers would not pay out if the policyholder needed to make a claim. Therefore there is a need for the industry to make policies clearer and to make sure they will pay out in all reasonable circumstances. Hopefully, this will give consumers more confidence in the product.”
David Harvey, trading unit manager at CGU, says: “There is no doubt that this type of insurance has had bad press. The government is keen to see the legislators and the industry examine the areas that have brought this about.”
The new minimum standards, published in February this year, currently apply only to the mortgage payment protection insurance element of accident sickness and unemployment cover. There is, however, talk of extending the standards to encompass other situations where insurance is taken out to cover other types of loan.
The new benchmark also applies to the newer mortgage payment protection insurance.
The aim of these new standards is to make sure that all such policies provide a basic minimum level of cover, although obviously individual insurers are free to offer a higher standard of insurance than the minimum.
The following minimums must apply:
All policies will pay out within 60 days.
All policies must pay provide at least 12 months cover.
There will be fewer automatic exclusions for medical conditions such as pregnancy complications and backache. These will now be individually assessed rather than automatically refused.
Policyholders must be given at least six months notice of policy changes.
There will be a better and more standardised approach to unemployment cover for the self employed and contract workers.
Contract workers will be able to claim for unemployment provided they have worked for the same employer for at least a year. And self employed people will be able to claim provided that they have informed the Inland Revenue they have ceased trading involuntarily and have registered for Job Seekers’ Allowance.
The new minimum standards must take effect no later than July 1 for new policies and no later than July 1, 2001 for existing ones. IFAs who think it might be worth advising clients with existing policies to cancel them and taking out new ones, might need to think again. Sue Anderson says: “Typically policies are significantly cheaper if people take them out at the beginning of their mortgage term. Therefore it might not be cost effective to switch someone to a new policy.”
This is because premiums are stacked against people who take out policies during their mortgage term. Put simply, lenders and insurers assume that anyone who takes out a policy after the event is doing so because they suspect they are about to be made redundant.
But lack of confidence in the product is not the only reason this type of insurance is not sold more frequently. Often the possibility of taking out this kind of insurance is introduced at the end of a long mortgage interview – almost as an afterthought or optional extra. And there is always the fear that, having sorted out a client’s mortgage, the prospect of having to take out life insurance, buildings and contents insurance, critical illness cover, income protection insurance and mortgage payment protection insurance, will be so daunting he or she might decide it is easier not to proceed with the mortgage application.
Peter Timberlake, public relations manager at Legal & General, says: “There are possibly some advisers who do not get around to discussing all the types of insurance that are available because they are aware the home buyer is keen to get the keys to their new property and does not want to have to worry about peripheral matters.”
Patrick Bunton, senior manager at London & Country, says: “I do have some reservations about this product. Generally speaking, I think income protection is a better contract and if people want unemployment cover, it is possible to buy this separately. As a rule of thumb, packaged products do not give such good value as shopping around for the best individual components.”
Of course, the million dollar question is, will the new minimum standards be effective in raising the profile of this type of insurance? Timberlake says: “They are not the be all and end all but they will help to make a difference and give people a degree of confidence. What is really needed is an on-going education process so that people understand what the product is and the need for it.”
Harvey adds: “The benchmark offers a standard against which consumers will be able to compare products they are considering buying.”
From an ITA’s point of view, it is important to make clients aware that such products exist and to outline the possible need for them. If this is done, there can be no comeback from the client or the regulators in years to come if a client doesn’t take it out and subsequently cannot keep up their mortgage repayments.
IFAs also need to ensure they are clear about their clients’ needs and any existing cover. The most common complaint levelled at this product is that people are sold policies that are not appropriate for their needs.
Giving all the more reason for the latest ABI initiative.