PLENTY has been written recently about mortgage income protection (MIP) being taken out by borrowers...
PLENTY has been written recently about mortgage income protection (MIP) being taken out by borrowers as an alternative to mortgage payment protection insurance (MPPI), but the way in which the contract is underwritten means it may not be suitable for everyone.
Occupations judged to be high risk can make MIP premiums very expensive and in some cases, the client's occupation can actually preclude them from taking out cover altogether. Despite this, IFAs should still be able to find alternatives or tailor different combinations of products to protect their clients' mortgage repayments in the event of long-term illness or disability.
MPPI cover is available to most borrowers and claims are paid out when the borrower becomes unemployed or disabled and unable to work, but while the mortgage repayments will be met, the policies generally only pay out for a maximum of 12 or 24 months.
Nick Homer, product marketing manager, income protection at Norwich Union Healthcare, says: "The main difference between MPPI and MIP is that MIP is a personalised product and borrowers pay for the risk they represent, whereas MPPI in the main is a pooled risk premium, which is great for a 55-year old brick layer but not for an 18-year old clerical worker."
Long term benefits
MIP will protect a mortgage until the end of the term or until the policyholder is fit to return to work. It was developed as a scaled down version of income protection and is targeted specifically at meeting the mortgage repayments should the policyholder have an accident or fall ill, but not if they become unemployed. This means that an unemployment benefit should be taken out in conjunction with it to ensure comprehensive protection.
MIP products generally cost more than MPPI products but the main difference is that for a slightly greater monthly premium the payments can, if required, continue until the mortgage debt is repaid.
However, premium loadings can be applied to women, smokers and people in some high-risk occupations may even be refused cover.
While MIP products can be competitive relative to MPPI for borrowers who have clerical or white collar occupations, the cost is often prohibitive for those who have manual or higher risk occupations.
Most MIP products allocate occupations on a rating from one to four with four being the highest insurable risk. Under Norwich Union Healthcare's Safeguard policy, for example, occupations given a grade one rating include accountants, IFAs, and solicitors. Grade four occupations include motor mechanics and security guards. And those occupations that would be declined cover include refuse collectors, policemen, and scaffolders. Homer reports that over the last few years some professions have risen up the risk scale. "Teachers were rated in class one but now they are in class three or even higher. This is generally due to the number of claims for stress or bad backs," says Homer.
Therefore, while MIP can potentially pay out for the life of the mortgage it will not be suitable for everyone. Kevin Pearce, protection marketing director at ZIFA, says that the problem with MIP is that it may be unaffordable for those who need it most. "The risks we want are the white collar workers - the lower risk occupations. At the other end, the higher price reflects the risks the policyholder represents, but often the highest risks have the lowest incomes - it is a catch-22 situation."
Higher risk groups
However, there are alternatives for those who fall into the higher risk bands and wish to protect their mortgage. One option, which may reduce the MIP premiums for borrowers while retaining the same level of cover, would be to take out combination of MPPI and MIP. In this situation the MPPI cover is used to provide immediate cover and the MIP product is taken out with a long deferment period - say 12 months - which begins payments when the MPPI ends. Recent research by GE Financial Insurance has found that the average unemployment claim lasts around 310 days and nearly 400 for a disability. The longer deferment period can therefore help to reduce the premiums, because the risk is reduced after a year.
Legal & General allows people to take out a combination of these benefits. There is a considerable difference in the monthly premiums between a MIP policy with unemployment benefit and an MPPI policy linked to an MIP policy with a 52-week deferred period. This saves the policyholder £24.98 on the monthly premiums, which works out at savings of £7,494 over the life of a policy based on joint lives both aged 30 next birthday, and a £100,000, 25-year repayment mortgage.
These policies are not part of a specific benefit plan but they can be used in this manner to derive cost savings in some cases. Richard Verdin, director, mortgage and protection markets at Legal & General, says: "We have a bolt-together system in place at the moment, but we are looking to put this under one wrapper later on in 2001 and there are currently a number of initiatives going on in the industry to align this cover."
Scottish Provident also offers a disability income benefit policy under its Self-Assurance menu plan which can provide a monthly income to cover the mortgage payments in the event of accident and sickness for the entire mortgage term, and for a maximum of 24 months in the event of unemployment.
However, again this can be very expensive for higher risk occupations. For example, a non-smoking male accountant, aged 45 next birthday, with a mortgage of £100,000 and monthly payments of £700 over a 20-year term would require a disability income providing a benefit of £8,400 per annum. Monthly premiums for sickness, accident, disability and unemployment benefit as well as monthly premium payment benefit if you become unemployed, would cost £46.62 per month. A bricklayer with the same criteria would have to pay £162.22 per month.
UNUM also has a more limited IP product, Essential Ability Cover, which is more affordable than some MIP products because it is based on an assessment of whether the claimant can perform a number of activities of daily living, and not whether they can perform their own job. The cover is therefore more limited than usual, but it can pay out until retirement. The cover is available up to a maximum of 125% of the initial mortgage payment.
But what of those people whose occupation is viewed as being so high risk that they would be declined MIP? Tony Ayliffe, life development manager at MGM Assurance, says: "They are effectively stuck with State protection. They can go for MPPI but above-and-beyond that, most providers in the market are not going to find them acceptable. The only alternative is to maybe go for an element of self-insurance with six to 12 months of savings, but I am not suggesting that this is an ideal solution."
Independent advice is crucial when taking out MIP because each client's protection needs will vary according to the size of the loan, their occupation and the deferment period they require. There are now mortgage protection policies on the market that can meet most protection needs but all the different providers rate occupations differently and so it can pay to shop around.
However IP products can be difficult to sell, even when sold in conjunction with a mortgage because they are viewed as an additional expense, but attitudes are changing and there are now policies to suit most budgets.
Pearce says: "IP is still quite difficult to sell because it does not seem as if you are buying much, yet if you sit clients down and ask them what concerns them most it will be next month's salary and next month's mortgage payment. "
Ben Marquand is a staff writer
