Under the previous benefit system, those receiving unemployment benefit were not means-tested until a year after making their claim. Now, it comes into effect after a six-month period of unemployment. Since mortgage protection policy payments are regarded as income, despite the fact that most pay out only enough to cover mortgage payments and insurance policy premiums, policyholders find their state benefits cut. Those receiving income support, or Jobseekers' Allowance, as it is now known, are means- tested from the start of their claim.
Many borrowers who took out mortgage protection policies to protect their mortgages after October 1995, when the Government ruled out direct financial help with mortgage payments for the first nine months of unemployment, feel they have walked into a trap.
Tony Baker, deputy director general of the Association of British Insurers, says although policyholders may be worse off in the short term, means- tested payouts are better than none. "You must bear in mind most people have found another job within six months. Earlier means testing should not create any difficulties.
But means-testing can create an administrative vicious circle. The DSS treats claimants with mortgage policies in a separate "new claims" unit, and will not calculate the benefits to which the claimant is entitled until it is aware how much the payment protection plan will pay out. Since most insurers will not make a decision on entitlement of payout for at least a month after the claimant has registered as unemployed, the claimant could find himself facing a period when he receives neither state benefits nor mortgage protection.
The private insurance sector relies on the public sector to kick-start the claims process. Before policy payments can be made, the local job centre must complete a section of the insurance claim form, proving the claimant is unemployed. This means claims are initially dealt with by gatekeepers who have little knowledge of mortgage protection policies, leaving the power to decide whether someone qualifies for payments in the hands of front-line administrative staff at Job Centres.
At one benefits office, a claimant was told that as he was not yet receiving income support, the official would not sign the form stating he was unemployed. This led to a delay in mortgage protection policy payments to which he was fully entitled.
Under the terms of payment protection policies, claimants must state they are "actively seeking work". In its statement of practice for payment protection insurance the ABI aimed to standardise this by demanding that all insurers agree to one definition of the term. But the Jobseekers Allowance now leaves it up to the Employment Service Adviser to decide whether the claimant meets the "actively seeking work" criteria.
If, at bi-weekly interviews, a claimant is not considered to be doing enough, his benefits will be stopped. It remains to be seen what effect this arbitrary definition of "actively seeking work" will have on insurance claims and how often it will comply with the insurers' new standardised definition. To date, insurers have said that they will review each case on its individual merits.
The Jobseekers' Allowance has also thrown up a new term - "employment on trial". If a claimant has not found a suitable job within 13 weeks, he will be encouraged to take any available, reasonable job. He or she must stay in this job for at least four weeks, but if it proves unsuitable, may leave within 12 weeks, without penalty and with a resumption of benefits.
Since mortgage protection policies do not cover voluntary redundancy however, this new scheme has created a dilemma for insurers.
The ABI says the scheme should be seen as a temporary job and not affect payments. But the onus is on policyholders to inform their insurer they are taking a job "on trial".