Showing clients what the state is likely to provide if they cannot work illustrates why income protection is so important. However, the way protection policies interact with state benefits can be complicated. So what do advisers need to know and how should this be relayed to clients?
Until fairly recently it was possible to claim benefits to cover mortgage interest payments. However, in April 2018 the format changed. There is now a loan which is repayable with interest whenever the title of the property is transferred, for example on death or divorce, or if it is sold.
This is a big deal in Scottish Widows financial resilience and protection specialist Johnny Timpson’s view. “Of seven million mortgaged households, 52 or 53 per cent will be joint mortgages. If one partner still works, they are not eligible for support for mortgage interest. This means huge swathes of the population are not protected by the welfare state so it is important to have that protection conversation,” says Timpson.
On the back of the change to Support for Mortgage Interest, the Building Resilient Households Group sought clarification from the DWP about whether income protection payouts that are used to pay a mortgage would be taken into account when assessing eligibility for means-tested state benefits.
Having received no clarification at the end of last year about whether policies paid out directly to lenders would be fully disregarded, BRHG joint chair Richard Walsh says the devil is in the detail. For policies where claimants have a choice in how to spend the proceeds, the disregard will apply only to the part of the policy that can be shown to be intended for and used to cover a mortgage.
“The question is how would you know it was intended to pay a mortgage or not?” says Walsh.
“Most policies state they are for mortgages and I think if they are bought through the adviser route it would be clear from the policy documents and conversation with the adviser that part of the purpose, or the sole purpose, is to pay the mortgage,” he says.
Some commentators are concerned there will be cases, particularly with older income protection plans that do not have “mortgage” in their name, where it is difficult to show they were intended to cover a mortgage even if that is how they are used.
“What you need is a precedent,” says Timpson. “We need an interesting back book income protection claim to go through the adjudication process to set a precedent.”
Walsh says paying the lender directly from the policy is not essential but is one way to make it clearer. “It helps your case if you’ve got to argue your case to the DWP,” he says. “You could also show bank statements for direct debits when the mortgage payments go out to ensure the disregard will apply.”
While Protection Distributors Group chairman and Cura Financial Services managing director Alan Knowles agrees advisers and clients need to be aware of how income protection and state benefits interact, he does not want this to scare people off.
“If we make too much of this, will it put people off? The mortgage disregard is where it gets complicated for advisers. Will it over-complicate things and stop advisers doing the right thing?” he says. “The worst position is if a customer is bamboozled by this and just relies on Universal Credit. It’s better to have income protection than not.”
Help for renters
According to Knowles, more income protection providers are talking about paying lenders direct, but he adds that this does not help renters protect the roof over their head.
There is plenty that needs to be done to help renters consider the benefits of income protection
Walsh says the BRHG is looking at how to help people who rent in the private sector as the way the Universal Credit housing allowance is calculated means it is often not enough to pay claimants’ rent in full.
“Traditionally income protection is not sold to the rental market and this is a real protection opportunity for advisers as there are millions of people who know, or will find out, that if they are too ill to work the state is not going to pick up all their rent,” says Walsh.
Legal & General has recently piloted a rental protection plan with Mortgage Advice Bureau aimed at this market. L&G product director for UK protection, Mark Jones, says there is plenty that needs to be done to help renters consider the benefits of income protection. “First, we need to address any risk of the value of insurance being reduced for some by the application for state benefits. Second, the products should be more obviously relevant to people who rent,” he says.
“The main challenge is how do we make it a little easier for intermediaries to engage renters on the question of whether they want to use insurances to protect their lifestyles. But I believe we’re moving in the right direction.”