Follow the path to find protection for your home
Threats to your home can come take many forms: storms, subsidence, accidents, crime, sickness, the loss of a job. How can you protect yourself? This three-page special report explores the options
Wednesday 05 June 1996
If you think choosing the "right" mortgage is hard work, it can be even harder to find your way through the insurance maze when buying a new home.
The range of products with the insurance label is often bewildering, and your route through the maze is not helped by the wide variety of names that different companies use to describe similar types of cover.
Buildings insurance is comparatively straightforward and if you are buying a freehold, it is compulsory. If you are buying a leasehold property, such as a flat, the lender will want details of the policy covering the entire block, which will be available from the freeholder or the managing agents.
Most lenders will now allow borrowers to take out the buildings insurance policy of their choice, so long as it provides acceptable wordings and levels of cover. An exception is with many of the low-rate fixed rate mortgages, where the fix is often subject to a tied insurance policy. In effect, the bank or building society is using the commission earned on the policy to subsidise the mortgage.
Buildings insurance is often sold as a package alongside contents insurance, but there are a number of variations in buildings cover itself. Abbey National, for example, offers both primary cover - for example rebuilding after fire or storm - and accidental damage cover, which would cover the cost of repairs if you put your foot through the ceiling while in the loft.
Bob Hornbuckle of the City chartered accountants Blackstone Franks, who specialises in arranging mortgages for accountants and other City professionals, suggests that buying buildings insurance from your mortgage provider may turn out to be a better bet than arranging your own.
"If you have a major claim for rebuilding work, possibly through subsidence or impact damage, you may do better with the weight of the lender behind you," he says. "If you get into a fight with the insurer, remember the policy is there to protect the lender's asset as well as your home."
Another form of insurance that new borrowers may encounter is known as mortgage indemnity guarantee (MIG) or high loan-to-value cover. It is normally compulsory for loans of more than 75 per cent of valuation, reflecting, say lenders, the greater risks involved in such loans.
MIG is taken out by the lender but paid for by the borrower - and comes in to play when a property is repossessed or abandoned. If the subsequent sale does not cover the loan outstanding, then the lender can claim under the guarantee. That does not let you off the hook; it simply means that you will be chased by the insurer, rather than the lender, for any shortfall.
Premiums vary, but for a 90 per cent mortgage on a property valued at pounds 60,000, expect to pay a single premium of around pounds 600. But you do not necessarily have to pay up in advance; in most cases the amount of the MIG is simply added to your loan.
If you have a repayment mortgage, you will normally be expected to arrange life assurance to clear the debt if you die during the term of the mortgage, and again this may be packaged with your loan.
Life assurance is not automatically top of the list, points out Stephen Quinn, a financial adviser. "If you are a single person with no dependants, life cover is a waste of money. The only other people with an interest in your home are the lenders, and they will claim it when you die."
Mortgage and payment protection can be divided into two categories: accident, sickness and unemployment (ASU) cover - the commonest form of mortgage protection - and cover for critical illness or long-term disability. While an ASU policy will normally last for 12 months or two years, critical illness insurance, known as "dread disease" cover, is intended for long- term illness which prevents you working. Although ASU cover is heavily promoted by building societies, it is not compulsory.
"Most people think of ASU protection as the most important, and for many people of course it is, but here again you need to look at your own circumstances. It may be that you should think about critical illness cover first," Mr Quinn says.
Both of these types of policy are designed to cover your outgoings. The other form of protection, permanent health insurance, provides an income if you are unable to work through sickness. "Obviously in an ideal world, people would buy into all four forms of protection, and we always try to explain them to people. It's then a case of deciding what you need, and what you can afford."
Mr Quinn is a director of Affiliated Financial Services - part of the Teachers Assurance group, which naturally means that he has large numbers of teachers on his client list.
"When we talk to teachers they are much more interested in the critical illness cover," he says. "They take the view that risk of redundancy is comparatively low - compared with most private sector jobs - and their terms and conditions include sick pay. But almost all of them know of a colleague who has been forced to give up work through serious ill-health.
"Whether you go through an adviser or do it yourself, take the time to work out what you really need, and then try to match it," says Mr Quinn.
MORTGAGE PROTECTION POLICIES
What happens to your home if you are suddently out of a job and without an income?
Mike and Diana Wilson were married at the end of August, and moved into their new home during early October, with a mortgage from a high-street banks. In the New Year, there was a bombshell: they both lost their jobs. A few hours after learning the bad news, Mike realised that he had forgotten to take out a mortgage protection policy.
"I had the application form in my bag and just did nothing about it," he confessed. "It's the old story. After all the running around to sort out the mortgage and the solicitors and the rest, it just got forgotten about."
The collapse cost Mike's bonus and commission - about pounds 15,000 - and neither of them qualified for redundancy pay. Diana quickly found work as a temp, while Mike began hunting for a job. But there were no immediate offers, and for the next two months it was a case of eking out Diana's earnings.
With their overdraft up to its limit, they put the house on the market, but the estate agents warned that they would be lucky to get the price they had paid just six months before.
"Basically we were hoping to find a buyer before the bank started talking about repossession," Mike said. "In the meantime I went to see the social security people." But with Diana in regular work, they failed to qualify for state help with mortgage interest payments. On 1 October - a few days before Mike and Diana moved in - stringent new rules on assistance with mortgage interest were introduced. The aim was to force most people to buy their own mortgage protection. In response to the new rules, both lenders and insurance companies have moved to develop their own protection plans. However, as Mike and Diana discovered, lenders may offer mortgage protection, but they do not insist on it.
Luckily, Mike found a new job a few days before the bank was due to obtain a repossession order. When pay day arrived, the first item on the shopping list, not surprisingly, was a mortgage protection policy.
"It seems crazy to me," he said. "The bank insisted that we had buildings insurance, in case the house burned down, but didn't insist that we had a policy to protect our repayments."
Mortgage protection, commonly known as ASU cover, provides cover for accident, sickness and unemployment. Monthly premiums are based on the amount of cover required and range from under pounds 4 a month to about pounds 8 per pounds 100 of monthly repayments. If you can, it is probably wise to buy enough cover to meet other living costs as well. There are various options.
Britannia, Britain's sixth-largest building society, gives new borrowers their first year's unemployment protection free. Gerald Gregory, head of lending, said: "It's obviously a significant cost to us, but we think it is worthwhile for two reasons. First, it makes sure that borrowers can continue to make payments if they do lose their jobs; and second, because it helps to keep our balance sheet clean by reducing bad debts."
At the same time as its free unemployment cover is offered, borrowers can also sign up for accident and sickness protection on competitive terms, and similar rates are on offer to existing borrowers alongside paid-for unemployment cover. Many lenders will include cover for other monthly outgoings, for example fuel bills and council tax, but there are limits.
Not all mortgage protection policies are sold by lenders. General Accident's Protect Direct policy, launched last year, is now the market leader among "standalone" mortgage protection policies.
A key feature of this policy is its flexibility. Borrowers can decide on the level of protection, the waiting time before payment starts, and whether they want the payments backdated to the start of their sickness or unemployment. Premiums are calculated individually, based on factors such as age, location, occupation and employment, as well as the level of cover.
Morven Laing, product development manager, says that there are such wide variations in personal circumstances that a "one size fits all" approach would never be satisfactory. "We think it is much fairer to consider the level of risk," she says. "It also means that we can give people a wider range of options that they can afford." Falling trees and rising damp ...TEXT: BUILDINGS INSURANCE
Competition for buildings insurance has deepened since the Office of Fair Trading, the competition watchdog, cast its beady eye over mortgage lending a few years ago. Lenders are allowed to tie in buildings insurance with discount or fixed rate mortgage deals, just as travel agents tie in cheap flight and holiday offers with travel insurance.
They must offer an alternative mortgage deal if the borrower does not want their insurance; but they are allowed to "vet" any buildings policy other than their own to make sure it is adequate both in terms of what it covers and the sum assured. They can charge an "administrative fee" for this service, generally about pounds 25.
Owners of leasehold flats, however, are tied in to the ground landlord's buildings policy. They should make sure it is approved by their lender and solicitor before purchase.
David Holden, general secretary of the Retirement Insurance Advisory Service, advises homeowners to "shop around" for buildings insurance. "But you must not be influenced by price alone," he says. In particular, you must make sure you have adequate cover in terms of the sum insured. If you have only insured for 80 per cent of rebuilding cost, then the insurer is entitled to pay only 80 per cent of the claim.
"You should also look at excesses, the amount the policyholder has to meet towards each claim. These can be high where subsidence claims are concerned. The best policies require a pounds 500 excess. But some ask for pounds 2,000 and others a proportion of the claim."
Buildings insurance covers the fabric of the building, usually defined as what cannot be removed by the occupier on moving house. It includes gas boilers, radiators, fitted kitchens, toilet fittings, interior decoration, as well as bedroom cupboards. But it does not cover cookers unless they are built in. Nor does it cover washing machines.
Policies usually include outbuildings such as garages, greenhouses and garden sheds, boundary walls and fences, patios and swimming-pools. Garden ornaments and plants, if covered, would be included in the home contents policy.
Insurance does not cover normal wear and tear, or breakdowns. If a central heating boiler breaks down, buildings insurance will not pay for the repair. But if water pipes burst as a result, the insurance should pay for the consequent damage. Damage caused by rising damp is also excluded.
It is worth checking roofs and gutters after abnormal weather. If these have been damaged, then that is not only covered by the buildings insurance but there may be grounds for claiming for consequent damage to interior decorations caused by damp.
If a tree falls on your home because of a gale, the damage is covered. If you fell your own tree and it falls on a neighbouring property, that should be covered under the liability clauses in your policy. If it falls on your own property, the damage is unlikely to be covered unless your policy includes accidental damage.
The more comprehensive buildings policies cover the cost of alternative accommodation while your property is being repaired or rebuilt. Flat-owners should check whether their buildings policy covers payment of ground rent as well.
Some policies offer a helpline for emergencies and virtually all will cover the cost of emergency repairs. There is usually an excess of pounds 250 to discourage small claims. So it may be worth considering a separate policy which covers household emergencies. For example, AA Insurance Services, through its annual cover scheme, will find a reliable repairer and pay for up to 90 minutes of labour. It does not pay for spare parts or material, however, or cover breakdowns of household appliances.
Household insurance has never been more competitive. The past decade has seen the emergence of direct insurers, who have forced the cost of premiums down by cutting costs and refining their claims procedures.
Today, insurers use sophisticated systems to give each customer an almost bespoke quote. Some quote on the number of bedrooms you have and adjust the premium according to the area in which you live; others find out a lot more about you - and if you have the right profile, or even the right postcode, the premium can drop dramatically.
It means that shopping around is likely to throw up large differences in the prices quoted. If you are not in the habit of phoning around for your contents insurance, then now is a good time to start before premiums start rising once more.
Many insurers have already warned that prices may soon rise. The country's leading telephone insurer, Direct Line, has seen its profits badly hit this year as heavy competition has driven down premiums. Warnings that the market cannot sustain such low prices suggest that price hikes are on the cards.
There are other ways to reduce your household-insurance costs. If you already have buildings insurance, taking out a contents policy with the same firm could save you money. Many insurers offer special deals for joint buildings and contents insurance.
It is also worth asking about no-claims discounts, which have moved from the motor department into the house arena. For instance, last month Legal & General introduced a no-claims discount on its new Rainbow home-insurance plan. After one year, claim-free policy-holders get l0 per cent discount, rising to 15 per cent after two years, and 20 per cent after three years. Direct insurer Churchill offers up to a 30 per cent reduction if you have had five claim-free years, and it also allows new customers to transfer their claim-free years from other insurers.
The right locks and bolts could make you eligible for insurance-premium discounts of up to l0 per cent. Check with different companies to discover which security devices will help save you money.
Taking a larger excess, say pounds 100, may also reduce premiums - but if your excess is too large, then your insurance could prove pointless. Joining a Neighbourhood Watch scheme may also reduce premiums.
It is important to check the small print on your contents policy carefully - particularly if you are buying or renting a flat - to ensure you are fully covered, warns the British Insurance and Investment Brokers' Association.
Before signing up for any insurance it is wise to take an inventory of your belongings. Most household policies, and particularly direct insurers, cover up to around pounds 30,000 to pounds 35,000 worth of belongings, but you would be surprised how quickly your possessions add up that amount. If your belongings are worth more than pounds 30,000 - or would cost more than that to replace - you may need to talk to one of the big insurance groups such as Commercial Union. Individual items worth more than pounds 1,500 will need to be specified in the policy.
If you are planning a long holiday (more than 30 days away), tell your insurer. Most companies will extend your cover, as long as you take some security precautions.
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