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Mortgage protection

Over 90 per cent of borrowers questioned in Legal & General&#39s

most recent &#39Moving Intentions&#39 survey said that they had arranged

life assurance cover purely to protect their mortgage.

So it could be claimed that consumers are taking a responsible

attitude towards life assurance protection when arranging loans to

buy a home.

However, while this is welcome and very good news, it&#39s not the full

story. There is still some way to go as far as full mortgage

protection is concerned. When the research was widened to look at

protection against the other risks associated with borrowing, the

picture did not look so positive.

&#39Moving Intentions&#39 found that only 21 per cent of mortgage holders have payment

protection insurance, 4 per cent have critical illness cover, with a

further 11 per cent having both payment protection and critical

illness protection.

A total of 36 per cent indicates that there is still some way to go,

particularly when the Mortgage Code requires advisers to explain

mortgage payment protection as well as the risks to home owner-ship

in the event of long term illness.

So why the gap between life and the other forms of protection? The

recognition of death risks can be attributed to the certainty that it

will happen – the only doubt being when. On the other hand the belief

that &#39it won&#39t happen to me&#39 may still influence decisions when it

comes to health risks cover.

Clients&#39 understanding of these risks can be enhanced by looking at

the chances of them facing various situations during their working

lifetime (to age 65). According to Munich Re (2002) a male non-smoker

aged 30 has the following:

•8 per cent chance of dying

•15 per cent chance of suffering serious illness

•20 per cent chance of being temporarily disabled

•55 per cent chance of suffering acute sickness

•67 per cent chance of being unemployed.

Realistic positioning of this information is vital. The death risk,

although lowest, must still be at the top of the catastrophe list for

any family.

However, for the other risks which are clearly greater, why should

the penetration rate be lower? What level of priority is full

protection being given at the time of house purchase?

Critical illness insurance is, after several years of sales success,

now entering a period of change. Guaranteed premiums have started to

increase with reviewable prices beginning to re-emerge after many

years on the back burner. Product variations could be the next step.

So the time could be right to re-focus on the core benefits offered

by long-term mortgage payment insurance delivered through income

protection-based products.

National Statistics data confirms there are approximately 2.3m people

claiming incapacity benefit. Of these, over 1m have been doing so for

more than five years. This adds fuel to the case for long-term

mortgage payment insurance. It also goes some considerable way to

explaining why underwriting this vital form of protection benefit can

appear to be more protracted and detailed than, for example, life


It is the assessment of the long-term morbidity risk presented by

individual applicants that demands the underwriter&#39s attention to

detail. However, as the majority of house purchases take around three

months from start to finish, there should be plenty of time for any

specific underwriting evidence to be obtained and to ensure these

valuable levels of cover are put in place.

Occupation has always been a key factor in the pricing and

underwriting of mortgage payment insurance contracts.

Recent developments now allow a wider range of occupations – those

typically classified as occupations &#393&#39 and &#394&#39 – to have cover based

on an &#39own occupation&#39 definition for the first two years of

disability before reverting to functional assessment test criteria

for the very-long-term claims. This is welcome and will add value to

these protection products.

The potential amounts at risk on mortgage payment insurance are significant.

Taking initial mortgage payments of £500 per month, cover of up

to 140 per cent of this can be arranged – £700 per month. This

means a total amount at risk of £210,000 (£700 x 12 x 25),

ignoring any increases in benefit that could arise under policies

designed to cover fluctuations in future interest rates.

Prioritising mortgage payment insurance in the range of protection

choices when buying a house can be time very well spent for both

adviser and client.


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