When you say the words ‘mortgage protection' what protection insurance do you instinctively think of?
You're probably thinking of life cover? Critical illness cover? Or perhaps decreasing term assurance? These are all insurance products that provide a lump sum to repay the mortgage in full should one of the mortgagors die or suffer a critical illness during the term of their mortgage.
These products are important and worthwhile for people taking out mortgage debts. But there is a greater risk that mortgage holders face of going off work sick and not being able to pay their monthly mortgage payments.
Whilst there is a general insurance solution called mortgage payment protection insurance, there are still some associated risks.
When you consider that the average age of a first time buyer in England is currently 33 . What are the chances of something happening that could stop someone from being able to pay their mortgage repayments?
Let's use an example to help highlight this risk. Let's assume it's a non-smoking man called Bob, aged 33 and he's taken out a mortgage for 30 years.
According to Royal London's Protection Risk Report; there's a 3% chance of death, a 9% chance of Bob suffering from a critical illness, but a 23% chance of him being unable to work for a period of two months or more during the term of his mortgage. That represents nearly a one in four chance.
This analysis is for an individual person but most mortgages are taken out on a joint-life basis which would make the chance of something happening to one of the mortgage holders even greater.
Far more life cover and critical illness cover is taken out each year by mortgage applicants when compared to income protection.
The data from these risk reports shows exactly why mortgage clients need income protection, because the risks for going off work sick are far higher than dying or becoming critically ill.
The risks of going off work sick are usually a lot greater than the risk of dying so it makes sense that income protection plans would carry a higher premium cost than life cover.
But income protection plans are more flexible than other protection plans and allow you to adjust elements of the cover in line with the client’s budget and priorities.
One element you can adjust is the term of the cover. The longer the term, the greater the risk and the more expensive it'll cost.
Our client example Bob could take cover to age 70 with many providers, but he could save a lot from his monthly premium cost if he set his cover to end at age 63, when his mortgage finishes.
You can also adjust the amount of cover. The more cover you opt for, the more expensive the plan will be. Income protection plans have maximum levels of cover that clients can take out based on their incomes.
Lastly, you can adjust the payment period which influences the cost of premiums. This is a relatively recent innovation but by limiting the length of time a claim is paid for; this can have a significant effect on the cost of the protection.
How much would income protection cost Bob?
Let's say he applies for £1,000 a month income protection cover on an indexed linked basis (RPI). He needs a three month deferred period and he wants cover for the length of his mortgage which is 30 years.
He decides to opt for an income protection plan with a five year payment period, this would mean any claims he makes would be paid for a period of up to five years.
An income protection plan like this would cost just £17.07 a month including waiver of premium (sickness) and plan fee .
There are lots of people out there with excellent life and critical illness plans which cover their mortgages. But if they go off work sick at some point during their working life or lose their income through sickness, they can't claim on one of their ‘mortgage protection' plans because they haven't died or haven't been diagnosed with a critical illness that meets a set definition.
Losing income through sickness and the subsequent inability to keep up those monthly mortgage payments is precisely what risk warnings on key facts illustrations are talking about.
The industry is making great strides to promote the idea of income protection and this is reflected in the amount of cover taken out in 2018 – a record year for income protection sales in the UK .
Product solutions have drastically improved over the last few years with features and benefits which clients can appreciate and see the value in.
Vincent O'Connor is senior business development manager at Royal London.
The full article was first published on COVER 14/08/19
1. Office for National Statistics: English Housing Survey 2017 to 2018. Published 31 January 2019
2. Figures correct as at 31 July 2019
3. Swiss Re Health and Term watch 2019