MORTGAGE PROTECTION

Which one really merits Fully Comprehensive Insurance?  

Amazingly, statistics show that a majority of UK adults will purchase 'Fully Comp' insurance for a car worth £15,000 but fail to take out any, or very little insurance, to protect a £150,000 mortgage or a £750 monthly mortgage payment. 

Additionally, although it is a condition of every mortgage that suitable Buildings Insurance is in place the recent floods highlighted that many people had no Personal Contents insurance whatsoever, or were substantially underinsured. On top of the misery of having your home flooded then comes the daunting task of having to find the money to replace all the ruined family possessions.

Taking these statistics at face value would seem to imply that we fear the financial loss of having our motor car 'written off' more than the fear of losing what is probably life's best investment - the roof over our head.

The mortgage payer who can say with 100% certainty "within the term of my mortgage, i will not die, fall seriously ill, lose my job or suffer damage to my property" doesn't need insurance..... the rest of us do!

The majority of mortgage brokers who have assisted customers with a damaged credit history will confirm that the ongoing ability to make mortgage and credit payments was often severely impacted by one or more of a recurrent set of events:

• Death of a partner
• Serious / Prolonged illness
• Unemployment
• Divorce

As yet, there is no insurance policy for divorce - maybe that's one for Dragon's Den - but a whole range of peace of mind protection exists for the other three events. 
A regulated mortgage broker who is qualified to advise on protection will seek to determine the customer's priority needs and recommend the most suitable suitable solution within the available budget. 

The overriding aim should always be to ensure that if the unthinkable happens, the protection arranged will deliver:

• The Right Money
• Into The Right Hands
• At The Right Time

The UK Protection Gap

There is thought to be a life protection gap of £2.3 trillion in the UK. (Source: Swiss Re 2006)

That's £2,300,000,000,000!!

4.2 million homeowners have around £217 billion of mortgage debt unprotected. (Source: Sainsburys Bank statistics). 

80% of new mortgages do not have Critical Illness cover. (Source: CML survey Q3 2003)

Sorry To Be Scary But....

• Over 270,000 people in Britain suffer a heart attack each year - one every 2 minutes (1)
• Around 100,000 people will suffer their first stroke - one every 5 minutes (2)
• 225,000 were diagnosed with one of the four main cancers (breast, lung, colorectal, prostate) in 2001 (3)
• More than 1 in 3 will develop cancer at some time during their life (4)
• A male has a 1 in 4 chance of suffering a Critical Illness before retirement - 1 in 5 for a female (5)
• Average age of 42 at time of claim on one provider's Critical Illness policy (6)

Why The Gap

From our experience of discussing mortgage protection assurance with customers over the years, three recurring themes emerge:

1. "Assurance is dead money - why pay out for something that may never happen"?
   If only we could change "may never happen" to "will never happen"...
   It may prove more perceptive to view the monthly cost of both mortgage and protective assurances as a long term 'joint investment' i.e. the wealth generating potential of our property may never be realised if we don't commit to the necessary protection. 
2. "Assurance companies never pay out
   Industry statistics indicate that over £1.2 million per day is paid out on insurance claims. Many assurance providers now publish claims payment statistics. The most frequent reason for non payment of a claim is is non disclosure of information which would have influenced the underwriting of the policy and setting premium versus risk. A regulated mortgage broker who is qualified to advise on protection can provide valuable peace of mind for a customer by ensuring that the required cover is correctly 'put on risk.'
3. "The State will take care of me."
   In the past this sentiment might have carried some weight - prior to October 1995 mortgage interest payments qualified for Income Support after only one month if the mortgage holder lost their income through illness or involuntary unemployment. For all mortgages taken out after October 1995 there is now a waiting period of 9 months before any State assistance can be claimed - and even then entitlement is not guaranteed. A mortgage lender may well seek repossession long before any State benefit cuts in.

PAY-SLIP versus PAY-CRASH

Pay-slip: Document that denotes gross pay, stoppages and net take-home pay

Pay-Crash: The likely effect when prolonged illness or unemployment strikes and the mortgage payer has no protective insurance in place. 

Even assuming that after 9 months, and passing Means Testing criteria, a mortgage holder is elegible for State aid in paying mortgage interest - not the capital - there still remains all the other costs of everyday living. In the event of prolonged illness the State may provide:

Long Term Incapacity Benefit
This currently stands at £81.35 per week and involves completion of a 48 page Application.

A mortgage holder earning £25,000 per annum would have an approximate weekly net income of £360 - this crashes by 78% if solely reliant on Incapacity Benefit of £81.35

The Pay-Slip Test

Before committing to a mortgage or other secured borrowing:

1. Take a long hard look at the net pay figure on your pay-slip.
2. Check out your entitlement, if any exists, to Employee Disability Benefits.
3. Remember that current Employee Benefits cease if you leave that employment.  
4. Consider the reality of paying a mortgage for 9 months before State aid cuts in. 
5. Consider the reality of paying  a mortgage and all other living costs if solely reliant on State Benefits.

As regulated mortgage brokers we would be failing in our commitment to Treating Customers Fairly  if  we didn't highlight the realities and  risks of secured borrowing. It is our duty to not only arrange the most suitable mortgage for every customer but to ensure that you retain ownership of your home should disaster strike. 

For Term Life Assurance and Critical Illness, Mortgage of Choice can arrange very competitive cover from a select panel of providers that currently comprises of:
Bright Grey, Friends Provident, Legal & General, Norwich Union and Scottish Provident.   

0800 988 1889   enquiries@mortgageofchoice.co.uk   Enquiry Form

Source of Data:
1 = British Heart Foundation. November 2003   2 = Stroke Association. November 2003
3 = Office for National Statistics 29 July 2004    4 = Cancer Research. November 2003
5 = ERC Frankona Re. 1998                             6 = Scottish Provident.