Should you sign up for the 'good guy' of cover to save your home?
Often damned by association with PPI, mortgage payment protection insurance has raised its game – and could come to the rescue if you are made redundant.
Sunday 11 January 2009
With the spectres of recession and redun-dancy looming large, experts reckon that it is important you have some form of protection in place to cover your mortgage, loans and credit cards if you lose your job or are unable to work due to illness or accident.
But while a host of insurance products are available to help you, many of these come with a less than sparkling reputation. Payment protection insurance (PPI), which covers repayments on loans or cards, recently came under fire from the Competition Commission, with the authority recommending that it no longer be sold alongside credit agreements.
PPI has long been criticised for being overpriced, filled with exclusions and often mis-sold. And with so much bad publicity, many consumers are now giving the product a wide berth.
However, they are being urged not to extend a blanket approach to mortgage payment protection insurance (MPPI), which is specifically designed to cover your home loan if you lose your job or are invalided out of work.
While PPI and MPPI are often viewed as being equally controversial, providers of the latter stand by it. "MPPI is invaluable at the moment, given the economic and financial landscape," says Shane Craig of Paymentcare.co.uk. "It is essential that people have some form of safety net."
Kevin Paterson from Assurant Solutions adds that there should be "no doubt" that MPPI provides valuable protection for consumers who do not have enough savings to see them through a period of hardship. "It is there to protect you against unforeseen circumstances," he says. "It can be the difference between keeping and losing your home."
Andrew Hagger from the price-comparison service Moneynet says it is unfortunate that MPPI, which normally pays out between 30 and 60 days after you become unable to work and continues to pay the benefit for 12 months – or sometimes 24 – has been tarred with the same brush as PPI.
"While PPI is often sold as a quick 'add-on' by somebody who is not usually an insurance expert," he points out, "MPPI is usually sold following a full and thorough fact-find that explores and establishes the customer's needs in great detail."
David Kuo from personal finance website Fool.co.uk adds that the sales process for MPPI has improved: "Lenders are now forbidden from peddling insurance at the same time as selling a client a home loan, and the upshot is greater competition, which means better deals for consumers."
That said, if you do decide to take out MPPI, it is vital you shop around as premiums can vary considerably.
Figures from the Council of Mortgage Lenders show that of the quarter of borrowers who have MPPI, three-quarters took out the cover with their mortgage provider. But these "bolt-on" policies tend to be more expensive, and you can usually make big savings by looking elsewhere.
"Cover from standalone providers can cost around £5 a month for every £100 of monthly repayment," says Mr Kuo. "A policy from your lender can cost three times as much."
It is also worth noting that while the cost of PPI has gone up, MPPI is holding steady. "To date, we've not noticed it getting significantly more expensive, nor products being withdrawn," says Matt Morris from protection broker Lifesearch. "While that has already been the case with standalone unemployment cover, we have not yet seen it with MPPI."
There is, though, speculation of costs rising this year and providers withdrawing from the market.
As well as looking at the price of MPPI, you need to be aware of exclusions with the cover. "Most MPPI policies will exclude stress and back trouble – two of the most common reasons for claims," adds Mr Morris. "You really want to find a policy that includes these conditions."
Also check if there's an "excess period" before the policy starts paying out, or whether the provider offers "back to day one" cover. And be aware that claims will not be met if you knew you were likely to be made redundant when you took out the policy.
Mr Morris says that while many people will go for MPPI, it may not be the best option. "It is certainly worthy of consideration, but because it offers limited cover and is relatively difficult to claim on, consumers should first consider policies such as income protection, which can be bought with optional unemployment cover."
Martyn Hocking at consumer body Which? agrees that although MPPI may sometimes be cheaper than income protection, policies pay out for just 12 months or, in some cases, 24 months. "Income protection, on the other hand, pays out until you can get back to work or until the policy ends."
It is also worth noting that if you are unemployed or on a low income, you may be eligible for what is known as income support mortgage interest (ISMI), a benefit that helps to pay the interest, but not the capital, on your home loan up to £100,000.
Until recently, only those aged over 60 were entitled to this help immediately, while most other people could not receive the assistance until 39 weeks after claiming. However, the Government recently announced changes to the rules and from this month the waiting period is reduced to 13 weeks. The limit has also been increased to £200,000.
While this is good news for those who are eligible, Mr Hagger warns that ISMI is no substitute for MPPI.
"To be considered for government assistance, you will have to satisfy a long list of requirements. If, for example, you have £16,000 or more in savings, you simply won't qualify," he points out. "With the prospect of unemployment posing a massive threat in 2009, an MPPI policy may offer some much-needed peace of mind and a financial lifeline if you happen to become one of the predicted three million jobless by the end of the year."
'The cover gives peace of mind and security'
Negara Khatun, 39, took out mortgage payment protection insurance and income protection with standalone provider Paymentcare.co.uk last year, when she became solely responsible for paying all the household bills.
"With five children to look after, I knew I had to get cover in case anything happens to me," says Negara, who works as a learning mentor at a secondary school in Bradford.
After spending time searching on the internet, Negara signed up with Paymentcare and now pays £7.50 a month for MPPI and £7.50 for income protection.
"I knew I had to be realistic about having something in place as a safety net to get me through the bad times," she says. "I chose Paymentcare as the company was offering the level of cover I needed at a price I could afford."
Negara was extremely glad she had the policy after a bad incident at home in April last year left her unable to work for a considerable amount of time.
"I claimed on the policy and was surprised at just how efficient the whole process was," she recalls. "As the sole breadwinner, the cover gives me peace of mind and security – especially in the current financial climate."
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