Protecting your assets

A great deal has happened in the protection market over the past 12 months. Pension Term Assurance has come and gone, mortgage payment protection (MPPI) has come under close scrutiny, the definitions of critical illnesses have been updated in line with the Association of British Insurance (ABI) standard definitions and, most recently, the Age 70 rule has been abolished. But the size of the market hasn’t grown and people remain vastly under-insured.

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This is hugely relevant to mortgage advisers, not least because you are really well placed to grow the market. Many only come to the protection table when they are taking out a mortgage. The challenge is keeping them there. Who else will help clients see why they should protect the mortgage and secure their home? And, if you’re not already doing so, you should be helping them to protect their actual lifestyle too. If things go wrong and the main breadwinner dies or suffers a critical illness, they won’t just want to keep their house, they’ll want to be able to afford to live in it too.

A substantial hurdle

It goes without saying that you have a substantial hurdle to overcome with many clients. Some people seem to view insurance as a necessary evil when they’re taking out their mortgage, not something of real value that is going to help them out if things go wrong. I’ve often wondered if people consider the risks they face when taking on a mortgage. The answer for many is probably not. This lack of concern and different priorities can mean people can often be extremely price sensitive and look for the cheapest, most basic cover, particularly when linked to a mortgage. This seldom results in best value for money or best financial planning, and often results in people buying off the shelf direct.

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But for someone who arranges mortgages, the risk of repossession is something that has to be taken seriously. You want to make sure your clients are adequately protected and you can use a range of protection products to match their liabilities and cover the risks they face. The real challenge to get them to value cover. That’s why you mustn’t forget for an instant that your advice could be what helps them to survive if the unthinkable happens.

What you’re offering them will provide peace of mind and could prove to be of huge value at one of the most difficult times in their life. If your client was to lose their job or be forced to take a long time off work due to sickness or disability, then their income could stop, along with their ability to pay their mortgage. Similarly the death of the main earner could have a serious impact on family finances and the family home could be put at risk. And let’s not forget all the necessary day-to-day living expenses over and above the mortgage. Despite the income multiple creep, in general, mortgage payments still represent 50 per cent or less of monthly outgoings for the majority of people, so they really need to protect more than their mortgage in order to maintain their lifestyle. That means being able to pay for food and clothing, and meeting any regular outgoings like nursery fees, car insurance, and road tax, etc.

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Products

So what protection products should you be recommending? Let’s start with MPPI. This will provide an income to cover the monthly mortgage payment if your client cannot work because of sickness and accident, or becomes involuntarily unemployed. MPPI is quite a straightforward product and clients usually pay a flat fee, say £3.50, per £100 of cover. They are generally not covered for any previous medical conditions, or if they know there is a chance they may lose their job when they take the policy out. If a client makes a claim, payments are usually limited to just one or two years. So obviously there are limitations to this cover and it will not suit everyone. But for some, MPPI at least provides an essential safety net to protect the mortgage.

Then there’s the option of life cover. The amount of cover can be matched to the mortgage – maybe on a decreasing basis for a repayment mortgage – and used to pay off the outstanding balance on death. This could be very important to a family left behind, because the last thing they would want at such a distressing time would be to face the prospect of their house being repossessed. Men in the UK have a one-in-12 chance of dying during their working lifetime, while for women the risk is one in 16. It used to be that lenders made it mandatory for people to take out life cover for their mortgage, but as we know this is no longer a requirement, which has probably contributed to the high level of under-insurance we see today in the UK.

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There’s also the risk of suffering a critical illness to consider – and it’s much higher. According to Munich Re, men have a one-in-four chance of suffering something like a heart attack or cancer during their working lifetime, while for women the risk is slightly lower at one in five. That’s why critical illness cover is so important. For single people with no dependents, it’s probably more important than life assurance. It pays out a lump sum if your client gets one of a clearly defined list of illnesses. This can be used to pay off debt such as the outstanding balance of the mortgage or to pay for drugs or treatment that is not generally available on the NHS. Or, more commonly used, life or critical illness cover, ensures that the mortgage is paid off in either eventuality, whichever happens first.

One question that comes up regularly is whether life and critical illness covers should be set up on a decreasing basis. If the mortgage is a traditional repayment mortgage, this is a perfect fit. But it is also important to consider the modern offset mortgages. If the outstanding mortgage changes frequently you need to look for products that allow cover to be increased, decreased or kept level according to the balance remaining within the flexible mortgage. Clients can then reduce the cover if they pay off a chunk of the mortgage loan or can increase the cover if they borrow more.

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Finally, there’s income protection to consider. This is like the accident and sickness portion of an MPPI policy, but with one major advantage: it can be take out over a longer term and will pay its benefit over the remainder of the term if your client becomes long-term sick. For example, if your client becomes disabled and can’t work one year into a 25-year policy, then the mortgage payments would be protected for the next 24 years, assuming the disability continued and no recovery was made. Most MPPI cover only pays for one or two years. While one year should be enough time to provide a financial breathing space to find another job after being made redundant, payments for just a year to someone who is long-term sick will not meet their protection needs. So a combination of income protection and an ‘unemployment only’ MPPI offers a wider coverage.

A wealth of options

So, there’s a wide range of options to match individual risk, but you may be wary of lengthening the advice process by introducing more products that need to be explained and forms that need to be filled in. To help, look for providers that explain things clearly and produce good literature that you can give to your clients. Modern menu plans can help you too, with just one application form and one provider to deal with for up to 10 different covers.

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Obviously your client may not be able to afford all the protection they need at the outset, but the advantage of beginning discussions at the complete package level and not just sticking to the basics is that they then understand that this is what they need to aim for. If they can, they can take out the cover right away, or they can add in more in the future when they can afford it. Modern menu protection plans are particularly useful in this respect as they can be upgraded later to include benefits missed off at the start.

All this helps provide the foundation for a long-term relationship with clients. But there’s one final thing to bear in mind, and I return to a point I made earlier, which is that ideally people need to protect their actual lifestyle and not just the mortgage. Otherwise they remain vulnerable. Their lifestyle will change as they move through life, so regular protection reviews make sense. Which is another way to help you to build up your relationships and close the protection gap.