Borrowers must protect to survive

What happens when accident or illness leave you unable to pay off your debts? Christopher Browne looks at some of the solutions
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The Independent Online

Seven million of us suffer from money phobia. We have dizzy spells at the mere thought of checking our bank balances, or opening the latest power bill. This disturbing statistic was revealed in a recent survey by Egg, the internet bank.

Seven million of us suffer from money phobia. We have dizzy spells at the mere thought of checking our bank balances, or opening the latest power bill. This disturbing statistic was revealed in a recent survey by Egg, the internet bank.

But debt is more likely to bring out the worst in us than financial phobia. At its most dire, it can cause loss of face, job, house, partner and even life. As a nation of inveterate borrowers, we need to ensure that we don't sink into a mire so dense that we cannot grapple our way out again.

Our monthly mortgage payments, have been cushioned by the lowest interest rates for 40 years, the housing boom has made us more asset-rich than we could ever have previously imagined, and government figures show that 11,900 homes were repossessed last year - less than a third of the number reclaimed by lenders in 1991.

Every cash problem caused by unemployment, illness or accident is unsettling and stressful. And a survey by the National Association of Citizens Advice Bureaux shows that our dependence on credit has pushed our debt problems up 46 per cent in the last five years, peaking at one million in 2002, while a Mori poll shows that 41 per cent of households lack anything to fall back on if the main wage-earner loses his or her job or becomes ill.

It all sounds very sombre. However, the Council of Mortgage Lenders (CML) asked Mori to canvass 3,000 consumers about their finances recently. The key question was how much they owed to everyone, from the bank manager to the drinking pal at the local pub. A total of 34-38 per cent said they had no debts at all, while a further 27 per cent said they spent up to 25 per cent of their income repaying mortgages and loans. That's almost two-thirds of the UK population with either no debt or a manageable level of it. Asked if they worried about what they owed, 34 per cent answered with an emphatic "no", 15 per cent said they did so occasionally, while three per cent said their debts had become a major preoccupation.

In the Victorian era, anyone who got into dire straits ended up in a debtors' prison. Today, luckily, a range of agencies exist to help us out of our personal mires, and there's always self-help: you can protect yourself against an unforeseen accident, illness or unemployment - with insurance cover.

If you have a loan or credit card, this is known as PPI (payment protection insurance), while mortgages are covered by MPPI (mortgage payment protection insurance). Insuring a loan costs around 15 per cent of the amount borrowed, while credit-card protection costs an average of 72p per £100 owed every month. Loan-cover payments begin 14 to 30 days after an accident or the start of an illness and normally continue until the loan's expiry date, while unemployment claims cover you for up to 12 months.

Monthly MPPI premiums range from £3.45 to £7 per £100 (or £20.70 to £42 on a £600-a-month mortgage). The period covered is usually 12 months and paid after 60 days. Some policies give you 24 months cover, while others pay out after 30 days.

Peter Lisney, director of insurance brokers Friendly Life, says all homeowners should shop around, but make sure they get adequate cover, as signing up to the cheapest quote will leave them exposed to the notorious domino effect. "If a family has inadequate insurance and one partner gets a long-term illness, their income will be halved. They may then have to sell up and move to smaller, more cramped accommodation, switch the children from good schools to less effective ones, and suddenly all the nightmares of debt will begin to set in," he says.

While MPPI is the finest cure for all known mortgage ills, prudence runs it a close second. Paul Fincham from Halifax Bank, the UK's largest mortgage lender, says: "Every household should put aside a cash reserve of at least three months' salary to see them through any unforeseen emergencies."

Families and couples can also benefit from critical-illness or income-protection cover. The first gives you a tax-free lump sum for a "named" serious illness or condition, while the second pays out a monthly tax-free sum for loss of earnings or major expenditure, such as loans and mortgages.

But there is another way to avoid the mortgage-time blues - tax credits. Almost everyone who works a 16-hour week can now claim the Government's new child and working-tax benefits. More than £1bn is waiting to be scooped up by UK employees. Yes, homeowners, it's time to collect.

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