An ageing population, a more mobile and competitive labour market and a shift away from the traditional family unit have placed increasing strains on the state benefit system. Tax and National Insurance contributions from an ever-shrinking active workforce have to support the living standards of a rising number of people drawing state benefits.
The UK government – unlike its counterparts in continental Europe – realised some time ago that this trend could not carry on. It concluded that while the state benefit system should remain as a basic financial safety net, people should be encouraged to provide for themselves. For the vast majority, this means turning to the investment and insurance products offered by the private sector.
One area in which the government is keenly encouraging individuals to make their own arrangements – thus reducing state support – is that of protecting the outgoings on a residential mortgage when a borrower is unable to work and earn due to injury, illness or unemployment. State benefits are available but, for mortgages completed on or after October 1, 1995, these do not start until individuals have stopped working for a full 39 weeks. How do individuals cope with their monthly outgoings in the meantime? One way to overcome this gap is with the help of privately arranged mortgage payment protection insurance (MPPI).
A message from the top
Government encouragement takes the shape of a written endorsement. The consumer leaflet “Take cover for a rainy day”, produced jointly by the Council of Mortgage Lenders (CML) and the Association of British Insurers, contains “A message from the government”. This enthuses: “The best way for many people to protect themselves against the risk of being unable to pay the mortgage is to take out mortgage payment protection insurance. The government strongly urges anyone with a mortgage or applying for a mortgage to consider whether they need MPPI.”
MPPI is designed to provide a regular payment stream to borrowers while, through no fault of their own, they are not working. The benefits can then be applied to cover the monthly mortgage outgoings. Benefits are payable for a limited term only, and most borrowers should be back at work when this period ends. Many of those who are not will by then qualify for state help with their mortgage interest – but not with their capital repayments – while a minority that is seriously disabled may receive private income protection insurance benefits.
MPPI is not compulsory, although the government is keen to see the majority of mortgage borrowers covered. Its target is a 55% take-up rate by 2004. Insurance intermediaries can play their part in achieving this target; their individual client banks will contain numerous unprotected mortgage borrowers. The challenge is how to access them. One possibility is to carry out a blanket mailshot. Another, more focused, approach is to raise the topic whenever a client notifies an intermediary of a change of address. A move to a new house will probably mean a new mortgage.
Early in 1999, the lending and insurance trade bodies introduced new “baseline” minimum standards to apply to all new MPPI policies issued on or after July 1, 1999. Existing contracts had until July 31, 2001 to fall into line.
What are these baseline standards? MPPI provides a monthly benefit, mainly intended to cover loan interest or, for a repayment mortgage, capital and interest. The baseline standards specify that the benefit must be payable for at least 12 months. The amount of benefit may be extended to include the cost of a repayment vehicle and buildings and contents insurance. There is, however, a waiting period known as the “initial qualifying period” before unemployment cover commences. For an application made at the time of the mortgage, unemployment cover should normally start after 60 days. For existing loans, this waiting period can be up to 120 days.
To obtain cover, applicants have to be in continuous employment or self-employment for at least the previous six months. MPPI is available to contract workers and the self-employed, who may claim on their policy if they have involuntarily ceased trading and have registered for jobseekers' allowance.
What's not included
For certain conditions – backache, mental and nervous disorders, for example – insurers will explore the medical background rather than simply exclude claims arising from them. Although they are able to alter the terms of or even cancel cover, insurers have to give a minimum of 30 days' notice for changes in terms and 90 days for cancellation.
As one would expect, there are a few exclusions. The most important are probably medical conditions that have either been diagnosed or treated in the previous 12 months. Also not covered are unemployment due to misconduct, giving up work voluntarily and unemployment that the borrower knew was pending at the time of application.
An intermediary must make sure they choose the right MPPI provider for their clients. They should look at the scope of the cover as well as the price and the insurer's administrative efficiency, particularly in processing claims.
It should also ask how long the insurer has been providing this highly specialised form of cover. In the recession of the early 1990s, soaring claims prompted a number of underwriters to discreetly withdraw from the market. The return of the good times has seen the arrival of new players on the scene, but will they be able to survive the next economic downturn?
There are a handful of insurers that have seen the market through repeated good and bad times, acquiring knowledge and experience on the way. A company that has demonstrated such a commitment, and is able to support this with a competitive product and high standards of service will certainly be the pick of the bunch.