What is an ASU policy?
The purpose of Accident, Sickness and Unemployment (ASU) insurance is to provide the policyholder with a guaranteed level of income in the event that they are unable to work as a result of an accident, becoming ill or losing their job.
Policies should provide enough income to cover mortgage repayments but also enough for the other household bills.
In recent years, insurers have introduced products that can be tailored to meet individual needs. This allows clients to protect themselves against the risk they are most concerned about, for example, illness rather than unemployment. This saves having to buy a full ASU policy and allows clients to purchase the cover they want at a lower cost.
Why do people need ASU, surely the State will provide support when people become unemployed or ill?
Job loss is the most common cause of people suddenly encountering problems repaying their mortgage. Sadly, the majority of people are not prepared for this eventuality, and fail to take out any form of protection because they believe the State will bail them out if they get into trouble. While this may once have been true, it is no longer the case.
Homebuyers who took out a mortgage before 2 October 1995, will not be eligible to receive any State support for the first eight weeks after a claim has been made. Thereafter, for the next 18 weeks half their mortgage interest will be paid. Full support will only be provided after 26 weeks.
And where a mortgage was arranged after 2 October 1995, potential benefits are substantially lower. No income support will be paid for the first nine months, and for larger loans only the first £100,000 of borrowings are covered. In every case, the State only meets the interest costs ‘ it will not, for example, cover any additional regular contributions associated with endowment policies taken out to pay back the capital.
To make matters worse, all claimants are means tested. Figures from the Department of Work and Pensions reveal that 70% of those who apply for assistance will not qualify for support because they have savings of over £8,000. Problems are sometimes caused because lump sum redundancy payments often exceed the statutory limits. Another problem is that means testing takes the income of the claimant’s partner into account as well.
Should everybody be encouraged to take out an ASU policy?
The Mortgage Code requires anyone who arranges a mortgage to advise the borrower to purchase some from of income protection. The best policy, however, will vary from person to person. Clients with low savings, a small deposit and poor job security or those who want peace of mind are the people who should be encouraged most to invest in an ASU product.
The Government, in partnership with the Association of British Insurers and the Council of Mortgage Lenders, launched the ‘sustainable home ownership’ initiative in July 1999, in order to reduce the volume of home repossessions caused by an unexpected loss of income. This initiative set the target of 55% of borrowers who should have purchased an income protection policy by 2004.
In total, around a quarter of borrowers are now protected but that still leaves around three-quarters of mortgage holders unprotected.
Is ASU cover expensive?
ASU cover is normally sold on a flat rate basis without the personal circumstances of each individual being assessed. Premiums do vary from company to company with the typical range being between £4 and £6 for every £100 of monthly income payment protected.
A typical policy provides 12 months of cover and will pay all mortgage repayments plus premiums associated with endowment policies or pensions where necessary. It is also possible to obtain policies that provide the protection required for two to three years.
Most ASU products also impose an initial waiting period between taking out the policy and making a claim. This exclusion period is usually 60 days, although it is possible to source policies with a 30-day exclusion period.
To be eligible for cover, clients will have had to be employed for at least the previous six months and not be taking out a policy because of a known imminent redundancy. Equally, existing medical conditions that could affect an individual’s ability to work will also need to be declared and will be excluded from the cover provided.
Is the cheapest cover the best?
Experience suggests that recommending the cheapest ASU policy to a client may not, in the long run, be in their best interests. Instead of focusing on the price of a policy, brokers should be looking at the overall package of benefits that a policy will provide and the needs of each client.
Good ASU policies provide the income required as well as a range of recovery services that will help people get back into employment as quickly as possible. The good news is that these additional services, such as assistance with finding a new job, access to a qualified physiotherapist or independent medical examinations and treatment, can be provided very cost effectively.
Claims management is becoming more important in the ASU market. Handled properly it should ensure policyholders receive a more personalised service, which will help get their life back on track as quickly as possible.
Where can a client obtain ASU cover?
ASU products can be purchased either as standalone cover from a specialist insurer or from a mortgage provider. However, policies sold by banks and building societies tend to be more expensive than products sourced through an intermediary network or user group by a broker.
David Quick is managing director of CETA