Clients can combine income protection with mortgage payment protection to create the perfect mortgage protection package, writes Nick Homer
Many believe that when it comes to protecting the monthly mortgage payment, you either need short-term mortgage payment protection insurance (MPPI), or long-term income protection (IP) with few choosing to take out both.
Of the two MPPI enjoys greater penetration mainly because it is the preferred lead product of many lenders and mortgage advisers when it comes to protecting the mortgage payments. There are several reasons for this:
• MPPI can usually be sold when the mortgage is arranged, regardless of the distribution channel used. However, other products such as IP, decreasing term insurance and critical illness (CI) cover have traditionally been sold during a fact-find process within the PIA environment. But not every new borrower will undergo a full financial review so a potential sales opportunity is often lost.
• MPPI is a straightforward product that addresses a specific need ' the mortgage payment.
• The sales process is simple with the application requiring minimal information and often forming part of the mortgage application form.
• Applicants are not medically underwritten as a pre-existing conditions exclusion applies for a defined period. All mortgage applicants are eligible to apply.
• MPPI can cover unemployment as well as illness or injury.
• It is single rated with one premium rate usually applying to all customers.
MPPI's success has therefore resulted in an efficient sales process that addresses a specific need at an opportune time.
Sales focus
With mortgage lenders under continued pressure to meet the Council of Mortgage Lenders (CML) target of 55% MPPI penetration on new mortgages, the focus put on selling MPPI is likely to increase.
A typical MPPI policy with a 12-month benefit payment period will cost around £5.50 per £100 per month benefit, plus insurance premium tax (IPT). Further examples of cost can be seen in table 1.
However, the emphasis put on selling MPPI and the success it enjoys should not deter IFAs selling IP, because MPPI alone does not provide comprehensive mortgage protection and still leaves clients' homes at risk. There are a number of reasons for this:
• MPPI is designed to cover the mortgage payment, not help maintain standard of living.
• Benefit is only paid for a limited term, usually 12 or 24 months.
• No rehabilitation benefit is paid to support partially incapacitated claimants and little or no assistance is given to aid recovery.
Most people accept that a period of unemployment is likely to be short-term, and is probably adequately covered by an MPPI policy. However, the same cannot be said of a period of incapacity.
IP can therefore be positioned as an up-sell opportunity to those clients already holding MPPI, extending the scope of their cover by providing them with a comprehensive package.
With the recent introduction of a 56 and 112-week deferred period under some IP policies, the benefit payment period can now dovetail with an MPPI policy perfectly.
Long-term IP cover provides considerable additional benefits:
• IP can provide a benefit level, in excess of the mortgage and associated costs, sufficient to help maintain standard of living throughout the mortgage term or until retirement.
• Some insurers are proactive in supporting claimants in their rehabilitation and will sometimes be prepared to assist before their benefit liability arises. This means an MPPI policyholder with IP cover could benefit from support the MPPI insurer could not provide.
• IP provides long-term security, no matter how many claims your client makes, because the terms and conditions cannot be changed.
• Benefits can be indexed to ensure the true value of the cover is not eroded over time.
• IP provides the flexibility to allow the cover to be increased following a house move or home improvements.
The addition of an IP policy can often be achieved at relatively low cost as can be seen in table 2.
The added benefit of taking out IP on a longer deferred period, for example 56 or 112 weeks, is that medical underwriting is less likely to be a barrier to taking out the cover, as the underwriters would only be concerned with existing conditions that could result in long-term capacity.
With 125,000 loans made for house purchase in June 2001 alone with 45% to first-time buyers (according to the CML), the opportunity to sell MPPI and IP in conjunction with mortgages is clear to see.
