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Income protection insurance

Doleing it out

It’s a common myth that if you lose your job the Government will come running to your rescue. It won’t. Olly Morrison takes a look at the insurance deals out there that will cover your monthly commitment

If you find yourself unable to work because of redundancy, accident or illness, the Government won’t pay your home loan for you. “A lot of people think that the state will help them out with their mortgage,” says Sean Gaught, product manager at insurer Pinnacle. “It will to an extent but there are caveats.” It will, for instance, only come to your assistance when you are nine months into your unemployment ordeal. Even then it will merely fork out the interest on the first £100,000 of your loan. The average new mortgage amount these days is considerably larger than that. Neither will the state come to your aid if you have savings of over £8,000 or live with a partner with a full time job. If you want more cover, mortgage payment protection (MPPI) insurance can offer more safeguards. It’s a very simple product. You pay a monthly premium and if you’re made redundant or are struck down by an accident or illness that prevents you from working the insurer will take care of your mortgage for 12 months. It won’t cough up if you were aware of an existing health condition when you took out the policy or had any inkling of your impending redundancy.

PAY OUTS

What you pay each month depends on the size of your mortgage. MPPI typically costs between £2-5.50 per £100 of cover. So if your mortgage sets you back £500 a month and the premium is £5 per £100 your MPPI would cost £25 a month. According to the Council of Mortgage Lenders, the average cost of MPPI currently is £4.95 per £100 of mortgage payment. You have the option with some lenders to pay more to cover yourself against other costs such as investments, utility bills other loans. Also affecting the policy price is the deferment period you choose -the period between losing your job and making your first claim. You can choose between 30 and 60 days: the longer the deferment period the cheaper the premiums.

Pinnacle, unlike a lot of providers, also calculates premiums by your age and claims under 45s pay less than older policy holders. Gaught says: “We believe younger people are more likely to get better if they are ill or get another job if they are made redundant.”

MPPI is usually bought at the same time as a mortgage. But you’ll be paying over the odds if you get it with your mortgage lender. There are exceptions but insurance firms generally offer the most competitive deals. Most people can get hold of MPPI quite easily and around 40 per cent of new mortgage borrowers protect themselves with it, also called accident, sickness and unemployment benefit (ASU). There are good reasons. A third of mortgage arrears are caused by sickness or unemployment, according to Pinnacle. Our savings are also often inadequate to cope with periods without employment. Half of us have less then £600 in savings, says the Institute of Fiscal Studies. A third have none at all. Most of us are in the red.

CRITICS

MPPI is lauded by both lenders and the Government, who don’t want to see a return of the mass repossessions of the unemployment-ridden late 80s and 90s. But it’s not without critics. It will only cover you for 12 months, for example. Policyholders are often under the impression they are protected indefinitely until they land another job. The self-employed can get cover but they must provide evidence they have ceased trading. Importantly, with some policies you won’t be covered if you are unable to work because of a muscle-related condition such as a backache - on of the biggest causes of staff being off sick.

INCOME PROTECTION

If you want long-term cover against being unable to work due to illness, accident or injury, including a because of a muscle-related condition, then an income protection policy might be best. This costs more but it will provide you with money every month up to your retirement age should you be unfit to work for that long. “Income protection is more expensive but it will give you security against a long-term illness,” says Mark Anders, sales manger for Liverpool Victoria. “MPPI only lasts a year. We’ve got claims from people you’ve been ill for years.”

You don’t need a mortgage to get this policy as the amount the insurer will pay out each month depends not on your home loan, but your salary. You apply by insuring a percentage what you earn. The maximum you’re normally allowed is 60 per cent of your pay packet, but it’s tax free. The less the percentage you claim for then the cheaper your premium. While dearer than MPPI, the cost of income protection varies in many ways. “Age and sex come into play,” says Kevin Carr from the insurance broker Lifesearch. “Smoking will double your premiums. A dangerous or stressful occupation will quadruple it.” As such, oil rig workers, pilots, professional drivers and members of the building trade can all expect dear premiums. While muscle-related ailments account for most of claims, stress related disorders such as anxiety and depression are in the fastest growing type of claim. Teachers and police officers especially are finding it hard to get cover. Entertainers, such as actors and musicians have it worse as their incomes are volatile, as do athletes and sports stars as any knock they get threatens their whole career.

Women also pay more. Females live longer than men but they tend to live unhealthier lives and make more claims, explains Anders. Also, if men become ill it’s likely to be with a condition that will, to put it crudely, finish them off. Women on the other hand are far more prone to stress, depression and anxiety. Just like MPPI the policy will be cheaper if you opt for a long deferment period. You’ll normally set this at the period when your employer will stop giving you sick pay - which is normally one month. You can’t receive sick pay and insurance pay outs. You can ask for a deferral period of up to two years. Self-employed people and contract workers, while they have no problems in receiving a policy, are likely to have lower deferment periods and accordingly slightly higher premiums as they do not receive company benefits such as sick pay.

Income protection will cover you against any condition that stops you working. As with MPPI you will be refused a pay out, though, if you were aware of your illness or injury when you purchased your policy. Lenders can check these details with your GP. Policies won’t include ill-health caused by self-inflicted injuries.

LENGTHY

Once you start getting the benefit it can last for years (claimants receive payments for five years on average) providing, of course, you are still unfit to work. Insurers have medical panels to check this and your case is usually reviewed every six months. Insurance firms want to claimants to get back to work as soon as possible to limit what they fork out out and they have become increasingly proactive in helping people re-enter the job market. If you are stuck on an NHS waiting list for an operation, for example, they may pay for you to get it done privately. They might pay for you to retrain. A builder unable to lift heavy loads could could retrain as a locksmith, for example. It may make up the shortfalls in your income while your new business grows. Your insurer may install IT for you so you can work from home. Or it might pay for your physiotherapy. Bright Grey, for example, gives customers free gym membership. Carr says claimants appreciate the help. “Most people with income protection tend to come form more professional jobs and tend to want to get back to work as quickly as possible,” he says. “And it makes sense for the lender to held them do this.”


So if you want to safeguard yourself against the trauma of redundancy, serious illness or injury if they come knocking on your door when you least expect it, these types of insurance policies make sense too.

WHY PROTECT YOUR MORTGAGE PAYMENTS WITH MPPI

WHY GET INCOME PROTECTION?


This article has appeared in Mortgage Magazine which is available in all good newsagents. Copyright MSM International Ltd
Published December 2005

 

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