How safe is your home?

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The Independent Culture
In case of misfortune, the last thing you want to worry about is how to pay for the roof over your head. In the latest of a series, Andy Couchman advises on mortgage protection

If you won the lottery tonight you could probably think of a few things to spend your jackpot winnings on: house, car, holiday and maybe a career change too; no more racing for that 7.26 to Paddington. Even if you don't play the lottery it still passes an idle moment to speculate how you would spend, spend, spend.

And if life's lottery works the other way, and redundancy, accident or illness dictates suspending the early-morning grind into work, it is a fair bet that one of the first things you will worry about is your home.

Yet only one in three new mortgages is protected against such an eventuality, a ratio that drops to just one in five for existing mortgages.

Until recently, there were good reasons why such cover had little appeal. Cover was expensive, small print was rife and the Government seemed happy to pay the interest on six-figure mortgages. Now, things are changing. The Government's attitude is summed up in the Benefits Agency's Which Benefit? booklet, a useful and sobering guide to the generosity of the welfare state, available from most Post Offices.

Of its 68 pages it devotes two-and-a-half to Housing Benefit (help with rent) and just three lines to help with mortgage payments. From 1 June, though, you will no longer be deprived of benefits if you personally receive insurance benefits to cover any loans.

For all mortgages taken out since 1 October 1995 the Government expects you to have insurance cover, stepping in to help only after you have had nine months off work. And its means-tested benefit pays interest only for mortgages up to pounds 100,000.

An often-overlooked rule, according to Philip Watson, director of John Charcol insurance brokers, is that benefit falls away if your partner works more than 16 hours a week.

Take out a new mortgage, and the chances are that your bank or building society will try to sell you its accident, sickness and unemployment policy - ASU, or mortgage payment protection.

It means fewer mortgage defaults for them, and commission rates of up to 40 per cent make it a profitable business, too. Policies typically pay all your mortgage costs - interest, capital repayment or endowment, household insurance and the ASU premium too for up to 12 months for unemployment; 12-24 months for sickness or accident. You can also often cover other monthly costs.

Surprisingly, insurers have become more generous as the Government has tightened its purse strings. Five years ago many people could not get cover. Today's products have improved substantially, says Philip Watson. "Now, as well as employees, both the self-employed and contract workers in areas such as health, computing and engineering can usually get cover, which will pay if their business ceases trading," he adds.

Previously excluded conditions such as stress and back injuries are covered, and those who already have a mortgage are not always charged more.

Some potential buyers are put off by fears that the insurer will not pay, or that cover for just a year is too short. Des Benjamin, managing director at UK Creditor, part of Consolidated Financial Insurance, the name behind many high street lenders' plans, says that both fears are unfounded. "We pay 120,000 claims a year, with most settled within 24 hours of receiving the claims documentation," he says, adding that most claims last four to six months and only 5-10 per cent last more than a year.

Philip Watson points to longer-term cover being available through income protection or permanent health insurance (PHI) which runs through to retirement.

ASU policies are annually renewable, so rates could rise in the future, although Des Benjamin says that they have been stable for some years. Both he and Mr Watson agree that ASU is under-sold. Benjamin says that 60 per cent of unsecured loans have the cover, 30 per cent of mortgages taken out through lenders but just 15 per cent of mortgages taken out through financial advisers. Few existing buyers add the cover, possibly because most claims tend to arise within the first year of a loan.

According to a recent Henley Centre report for Marks & Spencer Financial Services, two out of three people are now "very concerned" about losing their jobs.

Philip Watson says that you can buy unemployment cover on its own, and provided you are not under notice that your job will go, that could be attractive.

Cover costs from pounds 2.75 a month per pounds 100 of monthly benefit for unemployment only, pounds 3.14 for ASU, and is usually subject to a 28-90-day waiting period before unemployment or disability cover kicks in.

Even if you keep a policy going only for a year or two, it can pay to protect those early, vulnerable months when paying the mortgage or any loan is a struggle. If you do decide to buy, shop around. Your lender is likely to want to sell you a de luxe plan at premium rates, but can no longer insist that you take out its policy. Look for better deals from an independent financial adviser or local broker, but always ensure that you understand exactly what the policy does and does not cover before you buy.

John Charcol Insurance Brokers: Freephone 0800 939393. For a list of independent financial advisers near you, call IFA Promotion on 0117 9711177.

Andy Couchman is publishing editor of 'HealthCare Insurance Report'.