Mortgage Income Protection has been developed over recent years to enable clients to take out a more...
Mortgage Income Protection has been developed over recent years to enable clients to take out a more affordable form of income protection (IP), originally known as permanent health insurance (PHI). The cover is essentially a form of 'cut-down' IP in that it is targeted at a specific monthly outgoing - the mortgage repayment - rather than providing full income replacement in the event of a claim.
This can make it easier for the IFA to sell because the focus is on the need to be able to pay the monthly mortgage interest, rather than on covering an entire monthly income if the client becomes too ill to work for a substantial period of time.
One reason why people have not taken out this sort of cover for their mortgage in the past is that they underestimate their chances of being sick and off work for six months or more during their working life.
Recent research carried out for Scottish provident highlighted this. The graph opposite shows mortgage holder's estimates of their chances of being too ill to work for more than six months. As you can see, the responses varied widely, with only 7% correctly estimating that they would have a one in 16 chance of being off work due to illness for more than six months. Therefore, just over 50% of mortgage holders are too optimistic about their chances of needing help with their mortgage payments due to illness, while only 19% are too pessimistic.1
The charts opposite show the responses to the research when mortgage holders were asked if they were too ill to work for six months or more, whether the State or their employer would help them. These figures highlight the perception that still exists of either support from employers or the State, when the real picture is very different.
So why should anyone take out this form of cover? It can complement other forms of mortgage protection - for example, if someone is too ill to work but cannot claim under a critical illness policy, mortgage income protection can provide an important safety net to ensure that the mortgage is taken care of.
But why not take out mortgage payment protection insurance instead? This is a valuable form of cover, but the downside is that the claim period under these policies is limited to a year or two. As mortgage income protection has its roots in IP, a claim will be paid until either the claimant is able to return to work, their retirement or the end of the policy, whichever comes sooner.
In some cases, a proportionate benefit will be paid if, for example, the claimant is unable to return to their previous job but is able to work part time or in a less stressful, lower-paid position.
This can help the client back into the workforce while at the same time remove the potential financial worry of managing a mortgage on a reduced income.
If the benefit is based on the mortgage amount and interest rate, the client's mortgage commitments are covered as long as the interest rate they pay is no higher than the standard variable rate assumed by the insurer.
If a defined amount of benefit is used, there is often more leeway to cover other bills, with the calculation based on the mortgage amount and net income. The benefit can therefore be tailored more to the client's needs and what they can afford. It is more transparent as a known amount will be paid out.
However, if interest rates change the policyholder will either be left with a surplus over their monthly mortgage and household-related payments or a shortfall.
It should also be noted that if the client has other income protection benefits, care should be taken to avoid over-insurance as mortgage income protection plans often take account of other IP schemes when assessing the benefit payable.
Claire Williams is product marketing manager, mortgage protection, at Scottish Provident
Sources:
1. MFS research for Scottish Provident, February 2000
2. DSS Statistics 1997
3. Annual Abstract of Statistics 1996
4. Regional Trends 32, 1997
