Safe as houses: protection and the MMR

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Although mortgage brokers claim they have limited time, the Mortgage Market Review is highlighting the growing importance of protection, says Mike Farrell.

In the lead up to the implementation of the Mortgage Market Review (MMR) much was made of the negative effect on both the mainstream mortgage market and the protection market.

Mortgage brokers expressed concern that the new requirements and additional paperwork would increase the amount of time they would have to spend processing each mortgage.

Among those working within the protection industry there was belief that the unintended consequence of the MMR would be that protection sales fall.

Many brokers, having streamlined their operation, were already admitting to being overwhelmed by the increased demand for mortgages and, as a result, finding it difficult to make the time to discuss protection with their clients.

For the majority of the protection world, it felt the situation was likely to be compounded by the MMR - the challenge here being that clients may be less receptive to spending any more time with their advisers or dealing with any additional paperwork, making it even harder for brokers to sell protection.

The MMR was a comprehensive review of the mortgage market carried out to reform the industry to ensure sustainability and better outcomes for consumers in response to the housing crash in 2008.

And while there have been grumbles about the questions potential homeowners now have to answer, the reason behind the new line of questioning is sound: mortgage lenders want to be sure new customers can afford the mortgages they are taking on. 

It came into force more than a month ago and while mortgage interviews are now longer, the affordability issue that underpins the new rules makes it even more important for advisers to discuss the merits of protection with their clients.

The review was borne out of the need to ensure that property buyers can afford their mortgage at the outset, but protection will mean that a homeowner and/or their dependents can continue to afford the mortgage if they worst were to happen and they were no longer around or were off work ill for a sustained period.

Historically, buying a house has been one of the key triggers for someone to consider purchasing a life insurance policy, as new homeowners want to ensure their mortgage is paid off and their loved ones are financially secure, should they die or become terminally ill. However, if a homeowner purchases a protection product it can also reduce the future risk mortgage lenders face.

Back-up plan

Life insurance offers clients peace of mind that their loved ones will be protected if they die. However, statistically there is a far greater risk that a client will be off work for more than two months than there is that they will die before they retire.

Indeed, a 30-year-old male non-smoker is four times more likely to be off work for two months or more than he is to die before he reaches 65. Given these facts, it could be argued that income protection is the most relevant cover for working adults, regardless of their marital and familial status.

Recent LV= research found that the way that people live has changed dramatically over the past 40 years, with the number of single households more than doubling from 3.8 million adults in 1974 to 8.7 million adults now.

The study also found that not only are more people living by themselves - and subsequently facing the full burden of their household's living costs by themselves - they are doing so for much longer than before.

Of those adults that live alone, almost two-thirds admit they don't have a back-up plan, such as income protection, that would enable them to meet their financial commitments if they were unable to work.

Interestingly, out of those who say they have a back-up plan, close to a third say they would use their savings if they were unable to work, but almost of quarter of this group say their savings would run out within a fortnight.

Given that our figures show that, in the last three years, 435,800 people have been off sick for more than a year, it is clear many people's back-up plans are far from sound and would prove inadequate in the medium to long term. 

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