Wheels in motion

Accident, Sickness and unemployment cover (ASU) has been available in the protection market for a considerable period of time, but over the past decade, legislative and socio-economic changes in the UK have led many protection providers to take a fresh look at ASU.

The result is that we are witnessing the emergence of a new range of hybrid mortgage payment protection products designed to meet the increasing demands of today's borrowers. However, despite the range of new products on offer, many borrowers continue to be offered inadequate ASU cover.

Interest in the mortgage payment protection market was first set in motion by Government initiatives to reduce the amount of State assistance available through income support to borrowers unable to pay their mortgage as a result of accident, sickness or unemployment.

The current position is that if a mortgage was taken out prior to 2 October 1995, then after two months of a person being off work, income support will pay 50% of the interest payments. This amount will increase to 100% of the mortgage interest after a total of six months off work.

For mortgages taken out on or after 2 October 1995, the qualification period is extended to nine months off work and at that time 100% of the interest becomes payable. The maximum amount of the mortgage where the interest will be payable is £100,000 and there is a maximum interest rate set by the DSS. It should also be taken into consideration that payments are means tested both on income and savings. That means if a couple are seeking State assistance with their mortgage interest payments they must both not be working more than 16 hours a week and their joint savings must be under £8,000.

Raising awareness

It has been estimated that in the region of 70% of all mortgage payers would not be eligible for income support assistance because of their personal circumstances and the impact of the means testing rules. It is perhaps not surprising that the complexity of these rules meant a large proportion of the target did not realise the urgent need they had for mortgage payment protection insurance (MPPI).

In 1999, the Government issued its Sustainable Home Ownership Initiative with a target of achieving 55% coverage of MPPI by 2004. At the same time, a benchmark of minimum cover was issued which ASU contracts must meet. One of the main requirements was that cover against ASU should be available with a deferred period not greater than 60 days.

In 1999, a handful of insurance providers began reviewing the mortgage payment protection market and came to the conclusion that there was a place in the market for plans which offered a superior level of protection to that offered by traditional ASU contracts.

The products which were launched following the review period, not only met the minimum benchmark standards, but provided additional cover as well. For example, offering the standard maximum payment period of 12 months for the unemployment cover, but the accident and sickness cover being made available to cover the remainder of the mortgage term in the event of long term sickness or injury, be it five, 10, 15 or 20 years. An added advantage of these plans were that they offered permanent cover against accident and sickness as long as the premiums were paid, so the insurer could not discontinue the cover as they can with ASU contracts.

Sales figures of the new products indicated that the improved protection levels were popular with mortgage holders and in a significant number of cases the new contract was cheaper than the equivalent ASU contract.

Following the success of the new protection products, some providers have worked hard to continually improve product features. Much of this evolution has resulted from recognition of two key areas of concern:

l The total amount of cover available.

l The deferred period under the unemployment cover.

Under the new style mortgage payment protection plans the maximum amount of cover available was usually the lesser of the amount of the mortgage commitments, 50% of earned income less State benefits (currently £3,612 per annum) or £1,500 per month.

Covering all costs

A key point that research correspondents identified was, that although it was vital to have the monthly mortgage commitments covered in order to keep a roof over your head, other house bills did not cease just because you were unable to work due to an accident, sickness or unemployment. It was possible to take out additional income protection cover, but the preferred route was to deal with it in the same vehicle as the mortgage payment protection cover.

It is an interesting facet of the British psyche that, in general, we believe sickness and death is something that happens to other people, but not to us. However, a period of long term sickness would cause considerable financial problems to a lot of households in this country. For example, the average UK household has savings under £750 ' enough to cover one or two mortgage payments at most, according to the Institute of Fiscal Studies.

Another point to come out of research is that mortgage holders are more concerned about the risk of being made redundant because they had no control over this. Statistics show that over two million people were made redundant in the three years to February 2001 ' almost 59,000 every month, (Labour Market Trends, May 2001).

The majority of the new plans tended to have a deferred period of eight weeks before unemployment cover kicked in, meaning that if someone lost their job it would be 12 weeks before any payment was received by the insured. This is because the benefit was paid monthly in arrears, once the deferred period is completed.

Filling the gaps

Another factor taken into account by mortgage payment protection providers has been the change in pensions legislation which followed the introduction of stakeholder pensions in April this year. One of these rule changes was that it was no longer possible to include waiver of contributions cover, which ensures continuation of pension contributions in the event of being unable to work due to long term injury or sickness.

This is vital cover for pensions policyholders because if they are unable to work through sickness or injury, they will have great difficulty in maintaining contributions into the pension plan. This means there are not only short term problems caused by the lack of income, there is potentially a long term impact upon the provision of post-retirement income.

The new style plans take all the financial implications associated with the loss of income into consideration ' concentrating not just on mortgage repayments, but also on the bills and financial commitments which continue even when an income stops. Mortgage cover is bundled together with income protection and pension contribution provision, and customers can 'pick and mix' the various elements of the plans, according to their needs.

Providers now offer variations of the 'lifestyle' protection plan and further launches are in the pipeline for later this year.

The old style ASU contracts are still widely available in the market place and are likely to be offered to the majority of mortgage holders. It is disappointing, in the light of all of the changes which have taken place in the mortgage payment protection market over the past decade, that unsuitable ASU contracts are still sold without any consideration given to more suitable 'lifestyle' plans which are now available.

As an industry, we now have to raise awareness of the new style protection plans, educate the public on the superior cover that the plans offer, and emphasise the fact that often there is little difference in cost between a traditional ASU contract and a new 'hybrid' protection plan.