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Protect and survive

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  • 21/05/2003
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Fluctuating prices and tighter restrictions have meant that arranging the correct mortgage protection insurance remains complex, but it cannot be ignored

Years of tumbling term assurance premiums and steadily reducing critical illness (CI) premiums have sparked off a change in strategy in some quarters of the mortgage protection arena.

As cover has become increasingly inexpensive a clear case for using level term, as opposed to decreasing term assurance, has developed. Even though level term tends to cost around one third more on average it can enable valuable spare funds to be available in the event of a claim and avoid the need to effect a new policy if moving to a larger home. At the same time the attractions of the 5% to 10% savings achievable by taking out a term assurance policy with a CI add-on, as opposed to arranging entirely separate policies, also began to be re-examined. After all, quality of cover is an important consideration with CI cover and insurers offering the most competitive terms for add-on policies may not have the best wordings. This may get worse now the Association of British Insurers has changed the definitions on CI policies.

The fact that the whole add-on policy ceases once a CI claim has been made can also present a problem. Although the mortgage has been paid off, the claimant may require more life cover and may be severely loaded or turned down altogether for this because they have been critically ill.

The comparably small savings available from taking out joint-life policies have also begun to seem less attractive. Once a policy ceases after the first death a surviving partner can experience difficulty in effecting new cover if their health has deteriorated.

No change in demand patterns

However, premium increases experienced since last autumn could, in due course, start something of a counter trend. Premiums have risen on average by around 40% on guaranteed rate CI policies and by around 15% on reviewable rate critical illness policies. Term assurance premiums have also stopped falling and have even been edging forwards for some age groups. So far insurers report no concrete evidence of any change in demand patterns.

The proportion of Norwich Union’s mortgage term policyholders who have a CI add-on has, for example, remained broadly unchanged during the last two years at around 70%. During the same period the proportion of its joint-life policyholders on mortgage related business has remained at around 50%. Norwich Union does, however, acknowledge that cost considerations have been boosting interest in reviewable rate CI policies and, because it currently only offers a guaranteed rate format, it intends to launch a reviewable rate option this summer.

Nevertheless, Kevin Carr, senior adviser at intermediary LifeSearch, points out that there is in fact still relatively little difference in the cost of variable and guaranteed rate policies when intermediaries broke the whole market. He says: ‘If you shop around for the best deal, guaranteed rates still only cost around 5% more than reviewable rates on average but with the products of individual companies the difference can be 30% to 40% and the problem is that insurers send out press releases that get copied into the trade press.

‘The pricing situation may well change in a year’s time but we are trying to get the message across that guaranteed rates are not currently more expensive.’

Like the insurers, most intermediaries fail to offer even anecdotal evidence of any change in attitude towards mortgage protection strategies as a result of the rate increases and the minority that do so observe only a very slight trend or are sending out fairly mixed messages. Angela Kelly, an adviser at Fiona Price & Partners, says: ‘It remains largely a question of horses for courses with much depending on individual circumstances, but cost increases during recent months have meant there has been more resistance to CI cover. There has also been a slight shift towards decreasing term life cover.

‘A lot depends on what other debts have to be covered in addition to the mortgage. Decreasing term can be valuable if the budget is extended but the starting point should still be level term assurance. You can even use maximum whole-of-life cover for young people on the grounds that they should be able to afford the increases in premium in ten years’ time.’

Comparing the costs

Philippa Gee, an adviser at Torquil Clark, which also offers a separate discounted execution only arm, agrees. She says: ‘The premium is now even more important for clients than ever before so they are always very keen to compare costs between a joint life and two single life policies. Those who take advice normally go for decreasing term assurance but on the execution only side we are finding that level term is by far the most popular.

‘I feel that this is because ‘without our guidance’ a lot of people simply do not understand that decreasing term will reduce in parallel with the mortgage balance. On the execution only side CI cover is popular as an add-on for protecting a mortgage but on the advisory side people are going more for separate policies.’

Some intermediaries seem unlikely to look beyond level term cover even if life assurance rates go through the roof. A particular bone of contention is the fact that many decreasing term policies will not pay out as much as the mortgage if the average interest rate throughout the mortgage term is higher than 10% or 12%. Because we are concerned with the average interest rate even a limit of 10% is only likely to result in a shortfall of a few hundred pounds, but it is the principle that is considered important.

Others who recommend their fair share of decreasing term business point out that times have been changing and that there are now some policies with limits as high as 15% or 18%. They also highlight the fact that decreasing term policies are increasingly offering the facility to increase cover without having to provide further medical evidence if you are moving to a bigger home or remortgaging, thereby reducing the need for level term cover.

Chris Jones, financial planning technical manager at Charcol, says: ‘A couple of years ago I might have sold level term assurance on a standard mortgage so that there is money left over for the children but now I would want to see the right tools being used for the right job.

‘It can be better to protect the children by combining decreasing term with family income benefit, which is more suitable for the purpose because the latter pays an income rather than a lump sum. Although level term assurance would work, the extra cover will not be needed in the final part of the mortgage term when the children will have left school. ‘

When it comes to considering the merits of joint life policies and of CI add-ons, Jones still feels there are plenty of situations in which cost is far from being king. ‘Whether CI cover is an add-on depends very much on clients’ needs but if they want the cover badly we often arrange a large level term CI policy that is separate from the decreasing term life cover,’ says Jones.

‘House prices have risen so much that inheritance tax (IHT) is more of an issue even with relatively modest homes in the South East and separate term assurance policies written in trust for unmarried partners can deal with the IHT situation.’

But Brian Lentz, principal at Portfolio Insurance Consultancy & Mortgage Brokers, can count the number of decreasing term assurance policies he has sold during his 20-year career on the fingers of one hand. He says: ‘Any insurance that does not cover what it is supposed to is very dangerous, especially if you have arrears. In my view the fact that it may not pay off the mortgage in its entirety means that it is a flawed contract.

‘Selling something as simple as a decreasing term policy could lead to a legal claim if you said it would pay the mortgage, even if the shortfall is only a few hundred pounds. Despite the fact that general insurance is not yet regulated the rule of contract still applies and the ombudsman has so far not ruled out treating pre-regulation sales under post regulation rules.’

Intermediaries who feel they lack the expertise to provide robust protection advice can always consider indulging in commission splits with specialist independent financial advisers (IFAs). A couple of low-cost intermediaries, who are prepared to give personal financial advice via knowledgeable staff, are also prepared to deal on a wholesale basis.

LifeSearch, a London based low-cost intermediary, pledges to undercut any rival quote on the market as long as this does not involve going below zero commission. And the Health Insurance Shop, based in Mere in Wiltshire, tends to undercut the standard market by around 20% on average.

But the potential downside of these low cost intermediaries is that they cannot deal in regulated financial services business. The specialist IFAs, on the other hand, are able to consider the mortgage as part of a holistic approach to financial planning.

key points

Using CI as an add on to term assurance can push premiums up if they ever need to claim and then reinsure

Brokers can still find guaranteed rates which are close to renewable rates, if they are prepared to look.

Selling decreasing term assurance and level term CI cover separately can provide more comprehensive cover.

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