Be prepared for the job axe to fall
The right insurance cover is important to keep a roof over your head in the event of redundancy, or even illness
Sunday 13 May 2012
Whichever way you slice it, the outlook for employment is getting bleaker. Last week the Centre for Economics and Business Research said that the long-standing official prediction for joblessness was way short of the mark and that by 2016, we could see three million-plus out of work. A gloomy prospect indeed but if you have a financial safety net in place, you and your family can prepare for the worst.
"The most important steps you can take to reduce the financial damage caused by unexpected unemployment is to clear unsecured debts and create an emergency fund of cash savings," says Martin Bamford from independent financial adviser Informed Choice.
Budgeting plays an important role so calculate the minimum level of income you need each month and work to reduce the number of financial commitments within your household budget so that you will be more flexible should your income cease.
In unpredictable times it's more important than ever to keep on top of your bills and for most people, the home loan is the big one. Mortgage payment protection insurance (MPPI) is a financial product designed to cover your monthly mortgage repayments if you are unable to work because of accident, sickness or unemployment.
The payment protection insurance (PPI) mis-selling scandal hasn't done MPPI any favours but experts say consumers need to realise they are different products. PPI, which covers credit card and personal loan payments, is rightly tarnished after being sold inappropriately and with little transparency. MPPI hasn't escaped criticism, but it can be suitable for some.
"MPPI has clearly been tainted by the problems surrounding PPI sales and while there can be some limitations to MPPI it clearly could prove extremely valuable in the current climate," says David Hollingworth from mortgage broker London & Country.
"MPPI can offer cover against redundancy and will usually pay out for as much as 12 months with some offering the option to cover additional household bills in addition to the mortgage amount."
Historically, PPI and MPPI have been sold by lenders alongside mortgages but as of April this year lenders are banned from selling either product at the point of sale. A few lenders have abandoned the market with Santander the last to pull out in January 2012.
You can buy cover through an independent insurance broker, through the British Insurance Brokers' Association, who will assess whether it is the right product for your needs. They should ask what protection you have in place; through your own savings and any benefits offered by either the state (statutory sick pay can be claimed for up to 28 weeks) or your employer.
Other things they should flag up include the initial exclusion period, the time you have to wait after you take out the policy before you can make a claim. This used to be 60 or 90 days but some insurers are now insisting you wait 120 days for existing mortgages.
Checking for get-out clauses is the next task. Many policies will not pay out for pre-existing conditions but if you can afford to, it is usually advisable to pay a higher premium for the peace of mind in knowing that you have comprehensive cover. Be aware that if you are taking out a new policy they may exclude unemployment cover for a few months to prevent you from taking out a policy because you fear redundancy is on the way.
How easy it is to claim should also affect your decision and may vary widely from one insurer to another. For example, some ask for evidence from specialists rather than GPs. Most policies will only pay out for a maximum 12 months and there will also be a cap on payments, so very large mortgages may not be fully covered.
One problem with MPPI is that rates are reviewable so premiums can rise for new and existing policyholders. If unemployment is on the up or dire predictions such as issued by the CEBR hit the headlines then premiums will rise. MPPI is also a short-term solution and in comparison, long-term income protection (IP) is considered to be a superior product.
IP policies are individually underwritten and provide you with a regular tax-free income of around 50 per cent of your earnings if you cannot work due to sickness, accident or injury. Payments start after a number of weeks (the deferred period) and continue until you can get back to work, or until the end of the policy term, which is usually retirement.
Although most IP policies will not automatically pay out if you simply lose your job you may be able to add this to your policy. Scottish Provident, for example, offers bolt-on unemployment cover for its life, critical illness and income protection policies.
As a rough guide this adds about £25 to your monthly premium but remember the unemployment element works the same as an accident, sickness and unemployment policy and will only ever pay out for a year. It won't cover voluntary redundancy.
There are some practical ways to cut your premiums, for example, if you select a longer deferred period.
"A policy with a 13-week waiting period will typically charge lower premiums than one with a four-week wait because the insurance company's costs will be lower," says Richard Theo from comparison site Activequote.com.
Age and occupation make the biggest difference though; generally the older you are the more you pay because you are more likely to fall ill and an office worker is likely to pay less than a builder because there is a lower risk of accidental injury. You will need to undergo a medical interview prior to taking out the policy so be warned that the insurer may add exclusions at this point.
Crossover products could offer the best of both worlds, for example, the Mortgage and Lifestyle Protection product from LV= has been pushed as a high-quality alternative to traditional MPPI.
Deciding what, if any, protection products you want must be based on your individual circumstances. If you have been working for the same firm for a long time you may be able to secure a big redundancy payout and would only need cover for accident and sickness. Similarly, if you are eligible for generous sick-pay cover (as many public-sector workers are) you may be better off opting for a cheaper policy to cover unemployment.
Consider your savings too; MPPI will only pay out for a year, so if you can cover that time from savings don't waste money on unnecessary cover.
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