Homeowners take cover as the clouds turn dark

With fears mounting over job security and house prices, Laura Howard looks at the rising sales of policies that protect your income and mortgage payments
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The Independent Online

The mood has changed in the property market. The optimism of spring and summer has given way to a winter of unease over the direction of house prices and the wider UK economy. As a result, it seems, an increasing number of homeowners are looking to insure themselves against nasty "what ifs" like redundancy and ill health. With the property market recording its third successive monthly price fall, according to the Halifax, the option of selling up if things go wrong may no longer be there.

The Association of British Insurers reports that sales of income protection (IP) policies that pay out if you become too sick to work have increased by 26 per cent over the past year. Figures show that 43,000 plans were bought in the third quarter of this year, up from 34,000 for the same quarter in 2006.

Lifesearch, an independent financial adviser, has also reported surging interest in policies specifically designed to keep up payments on a mortgage debt. Matt Morris at Lifesearch says: "There is a downturn in confidence sweeping the housing market and a general realisation that the 'cushion' offered by rising house prices and low interest rates is no longer available. As a result, we are taking significantly more phone calls from people wanting cover for their mortgage repayments. Our team of advisers are currently reporting up to 2,000 enquiries a week."

But Mr Morris says homeowners are at risk of getting their insurance priorities wrong. The entry point for mortgage-related protection enquiries is usually life cover, as people become concerned about how their family would cope with no income, according to Mr Morris. But he points out that death is the event that is least likely to occur in terms of someone being unable to work. "It's more likely to be an illness, which is why income protection should be the first policy people consider. It can also work out cheaper."

IP, otherwise known as income replacement or permanent health insurance, pays around two-thirds of salary if you can't work because of ill health or injury, until such time as you can resume your original job.

Basic IP insurance does not cover unemployment but Mr Morris says that many policyholders have been calling to add "bolt-on" redundancy cover at an average cost of around 25 a month. A standard IP policy for a 40-year-old office male office manager, without redundancy cover, costs some 30 a month, according to Lifesearch.

Mortgage payment protection insurance (MPPI), sold by mortgage lenders, promises to meet the repayments on a home loan if the borrower can't work. This seems straightforward enough but MPPI has had a bad press. For a start, it is only designed to cover your home loan, whereas by compensating you for most of your salary, IP will usually provide more funds. And, also unlike IP, MPPI is an "any occupation" policy: as long as you're fit to do some work, not just your own job, you won't be paid.

MPPI also typically excludes pre-existing conditions as well as new health problems if they are stress- or back-related. Consumer groups say fewer than one in five claims made on these policies end in payment.

What's more, MPPI only pays out for a maximum of one year and the terms and conditions an change even once an agreement has been signed. "We only sell a handful of these policies; nine times out of 10, they are not the most suitable or cost-effective option," says Mr Morris, who usually points clients towards income protection.

The new interest in protection products should not be overstated. Although, some mortgage holders have read the economic runes and are diving for insurance, many more are either oblivious or can't afford the extra expense.

"Part of the problem is that interest rates are 1 per cent higher than they were in August 2006," says Melanie Bien, director at broker Savills Private Finance. "As a result, the cost of the mortgage itself is much more. So many borrowers feel they can't afford the cost of cover on top. Yet it is important to take a longer-term view and consider whether you and your family are protected if you are no longer able to bring in an income."

Rob Clifford, managing director of broker Mortgageforce, which also sells IP and life insurance, says that the general attitude towards this type of protection is "surprisingly lax", despite the recent increase in sales. "We all insure our televisions and holidays but when it comes to the family home, it gets overlooked.

"Of course any rise in protection sales is a good thing, but ultimately mortgage-related insurance is still a product that is sold and not bought."

For those homeowners still uninsured, some relief came last Thursday when the Bank of England's Monetary Policy Committee cut rates by 0.25 per cent to 5.5 per cent.

This will cut repayments on a 100,000 mortgage by around 15 a month. But even so, says Mr Morris, borrowers should be aware that any number of interest rate falls will not protect them against illness.

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