Mortgage insurance: do you really need it?

After all the exclusions you might be better off with some 'rainy day' savings, says Edmund Tirbutt
Rising mortgage rates are set to prompt a new marketing blitz from lenders for an expensive type of loan-payment insurance.

The idea of what is known as mortgage protection insurance is that it pays much of your monthly mortgage payments if you are made redundant or cannot work because of long-term ill-health. But while the idea may sound superficially attractive, particularly in the light of rising mortgage costs, borrowers should be warned that it is generally an expensive form of cover.

For example, a standard policy from Abbey National to pay a pounds 500 a month mortgage - but only for up to 12 months - would cost a hefty pounds 450 a year: in effect the cost of another monthly mortgage payment. Moreover, such a policy would not pay out for the first 30 days of redundancy or ill- health and you are generally not covered if you are made redundant within 90 days of taking out a policy - a feature put in place by insurers to protect themselves from people taking out policies when they know they are about to be laid off.

Borrowers considering cover of this kind - and around one in three people taking out new mortgages take the insurance add-on - might be well-advised to tuck away a few thousand pounds in a building society instead: in effect, to "self-insure". Indeed, it might be asked whether a borrower who cannot muster such a cushion should have such a large mortgage.

Mortgage lenders find little difficulty in presenting arguments in favour of the insurance. Their principal selling point is that support from the state is not as generous as many people imagine.

Even those who qualify for help will not get their mortgage interest paid for the first nine months of their claim if they have taken out a home loan since October 1995. Those with mortgages dating back to before October 1995 will not receive any help for the first two months, and will only get half their interest paid for the next four months. From then onwards the full amount will be paid.

In addition, any assistance coming from the Department of Social Security will be limited to mortgage interest and will not help with endowment premiums or with capital repayments on a repayment mortgage.

Of even greater significance, the lenders point out, is the fact that seven out of 10 home owners do not even qualify for state benefits - either because they have savings in excess of pounds 8,000 or because they have a partner who works full-time.

Such arguments are more compelling when they come from lenders quoting prices at the lower end of the scale. Prices of standard policies vary from pounds 4.50 to pounds 8 per pounds l00 of monthly mortgage repayment (pounds 22.50 to pounds 40 a month for a pounds 500 monthly repayment).

Care should be taken not to confuse standard cover with low- cost plans. The latter, which can be obtained for only pounds 3 or pounds 4 per pounds 100, do not normally pay for the first 60 or 90 days of a claim. They also tend to make payments for a maximum of nine rather than 12 months. This feature is justified on the grounds that it dovetails with the state benefit structure for post-October 1995 loans (the insurer's payments stopping at the nine-month point that state help begins).

Plans that offer cover for redundancy only, or accident and sickness only, are also commonly confused with standard cover. A growing number of lenders now provide these as an option but they normally represent even poorer value than the combined package.

Prices can vary slightly according to ages of applicants and the risk- categories of their jobs, but broadly speaking, anyone offered standard cover by their lender for more than pounds 5.50 per pounds 100 should consider looking elsewhere.

While they will not be able to buy a policy from another mortgage lender (unless they choose to switch their mortgage as well), borrowers should achieve a competitive price via an independent financial adviser (IFA). A standard policy put together by the insurer ITT London & Edinburgh can be bought via IFAs for as little as pounds 4.31 per pounds 100. Alternatively, General Accident is unusual in selling standard cover direct to the public. It normally charges pounds 4.50 to pounds 5 per pounds 100.

But even those who purchase standard cover should pay due attention to significant exclusions. As well as not paying out for redundancies that occur within the first 90 days, most policies will not pay out on claims for medical conditions for which a person has been treated during the 12 months prior to taking out cover. Longer-term recurring conditions can also be excluded. It should also be noted that cover normally applies to redundancy as opposed to unemployment. Anyone who leaves a job of their own accord or who is sacked for misconduct will not therefore be covered.

Redundancy cover is also of limited value to the self-employed as they are only able to claim if they actually cease trading - as opposed to merely having a bad patch.

Contract workers in industries where short-term renewable contracts are the norm should be able to obtain redundancy cover as long as they can demonstrate a history of at least two renewals. Seasonal contract workers, however, are unlikely to be covered.

Insurers report just as many claims for accident and sickness as they do for redundancy but emphasise that fear of redundancy is normally the main reason for buying. Some people live in far greater fear of redundancy than others and the decision on whether mortgage protection insurance is worth while is always likely to be a personal one. But for many people, keeping a reasonable savings cushion is likely to be a better option.