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Fits like a glove

  • 04/12/2001
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Recommending a menu-based product will ensure your clients are covered ' whatever life holds in store

Lenders these days show little desire to sell borrowers mortgage protection, nor do they make any attempts to find out whether protection is already in place.

But when the mortgage offer hits the doorstep it will always include the same warning: ‘Your home is at risk if you do not keep up repayments on a mortgage or any other loans secured on it.’

You will have read this warning a hundred times and perhaps often dismissed it as another necessary item of legal small print which has to appear on all sales material relating to house purchases. It is easy to ignore this statement and perhaps lenders should be stronger in pointing out its implications. But for any mortgage adviser looking to develop their protection business this statement should not be ignored ‘ in fact it is one of the strongest protection sales messages there is.

UK mortgages are still under-protected and the fact that lenders are no longer making it a requirement that clients take out life assurance to cover their mortgages will only exacerbate this problem. While this is not a problem if the client is single and has no dependents ‘ if they died the house could be sold to repay the lender ‘ where the borrower has a family, lack of adequate protection could leave the family with a serious financial dilemma.

Many negative articles have been written about endowments, but for all their faults one advantage they did have was that people got life assurance automatically included within their repayment vehicle. As many modern endowments also include critical illness (CI) cover, a move away from endowments could mean fewer people protect their mortgages.

A new breed

But instead of lamenting the passing of the endowment, advisers can look forward to the opportunities that exist to write profitable protection business to cover the new breed of flexible mortgages. Traditional repayment mortgages are being replaced by the flexible mortgage where capital and interest is paid each month, but where in addition, the borrower can sometimes pay more, sometimes pay less, repay chunks of the mortgage when possible and draw down further loan funds later on. New mortgage propositions allow the customer to combine their savings into the same account as their debt, so any credit on the savings side can reduce the amount of interest payable on the outstanding loan.

So if the outstanding mortgage can change, the traditional mortgage term assurance solution that decreases at the same rate as the mortgage was traditionally repaid is no longer viable. Protection, however, is still as important. The new generation menu term assurances, which have developed over the last few years, allow cover to be increased, decreased, or kept at a level according to the balance remaining within the flexible mortgage. Clients can reduce the cover if they pay off a chunk of the mortgage, or can increase the cover if they borrow more.

Most importantly, these modern term assurances also allow clients to select more than simple death benefit to protect their mortgage. They can include critical illness (CI) cover, income protection (IP) and unemployment benefit. Including this protection cover in the sale is the key to giving the client the comprehensive mortgage protection they need. Intermediaries can also develop their own business at the same time.

Consider a client with a mortgage of £100,000. As we have already seen, some lenders do not insist the client takes out some death cover. These days death cover is not enough, so it is all the more worrying that this basic foundation is not being recommended.

Beyond life cover

People should be looking beyond death benefit at CI, IP and unemployment benefit. Why not provide comprehensive protection with £100,000 of death and CI cover coupled with £500 per month of IP and £500 per month of unemployment benefit?

Flexible protection product would also keep pace with any changes in the outstanding amount of the client’s mortgage. If the client paid off £15,000 early, then the death and CI cover could be reduced to £85,000 to reflect this. If the client was offsetting savings against their mortgage and this reduced their monthly repayments down to £350, then again, the monthly IP and unemployment benefit amounts could also be changed.

A good way of reinforcing the concept of comprehensive mortgage protection in the mind of the client is to compare it to car insurance. Nobody takes out the legal minimum of third party only. Few would even consider third party fire and theft. Most people go for fully comprehensive cover. Death benefit is the equivalent of third party only.

Rather than just starting with death benefit and then adding the other benefits during the course of the discussion, advisers could start their mortgage protection discussions at the fully comprehensive level. The client may not be able to afford all the protection cover initially, but flexible term assurance can be upgraded at a later date to include benefits missed off at the start. The advantage of beginning discussions at the complete package level is that the client understands that this is the optimum protection package for their mortgage and understands this can be set up immediately, or when they can afford it in the future. The advantage for the intermediary is that it provides the foundation for a long-term relationship with the client.

Over the last few years advisers have been selling death benefit, or death and CI benefit (either through an endowment, or through term assurance) to protect their clients’ mortgages. But it is the lender who may have written a mortgage payment protection insurance (MPPI) policy for the client when they signed up for their mortgage. It is possible the client may have felt the cover was part of the conditions of the mortgage.

It is important for intermediaries to make sure their clients are aware that their lender’s MPPI plans are not compulsory and that they have a choice.

IP in combination with unemployment cover can offer a better level of protection. Remember IP will pay its benefit over the whole term if the client becomes long-term sick. For example, if the client became disabled and could not work one year into a 25-year term, the mortgage payments would be protected for the next 24 years, assuming the disability continued and no recovery was made. But most MPPIs would only pay for one year. Whereas one year should be enough to provide a financial breathing space to find another job after being made redundant, a one-year payment to someone who is long-term sick will not meet their protection needs.

A better choice

In addition you have more choice for your client. IP is available with an own occupation definition. But most MPPI schemes only offer any occupation.

The bundling of IP into menu products has given the IP market a kick-start over the last few years. And recent innovations have taken the menu product economies of scale one step further. Unlike personal protection, where a client might need an IP benefit to continue after a CI claim, especially if the illness is long term, a mortgage only has to be paid off once. Once a CI payout has cleared the outstanding loan there will be no more monthly repayments.

In this situation, the need for mortgage IP would be cancelled after the payment of a CI claim. As a result, the cost of the IP benefit could be between 30% and 40% cheaper because it is integrated with CI.

There is a huge market for comprehensive mortgage protection. People are under-insured, and with the flexible products currently available that fit the modern flexible mortgages like a glove, advisers can ensure their clients are fully protected and that their own businesses grow as a result.

sales points

Borrowers can now combine life cover, critical illness, income protection and unemployment cover in one policy.

Flexible mortgages demand protection that can accommodate any changes to the outstanding debt.

Products that can be amended to meet changing requirements provide advisers with the opportunity to build ongoing requirements.


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