When you hear the words ‘mortgage protection’ what do you instinctively think of? You’re probably thinking about life cover or critical illness cover? Or perhaps decreasing term assurance?
These are all great ideas and excellent advice for people taking out mortgages as they can provide a lump sum to repay the debt in full if one of the mortgage holders dies or suffers a critical illness during its term.
But what about the potentially greater risk that mortgage holders face - the risk of going off work sick and not being able to make their monthly mortgage payments?
There’s a general insurance solution called mortgage payment protection insurance but it only pays out for a short period. What about a pure protection version - something that can pay a benefit for a lot longer?
Well, we already have one - it’s called income protection. We don’t tend to associate it as part of the mortgage protection solution but should we?
What are your mortgage clients’ risks?
Mortgage key facts illustrations, which lay out all the features and the terms of the mortgage product, always have a warning that along the lines of “YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE"
But what exactly are the risks this warning is talking about?
Let’s look at an example. Bob is 30 years old, the average age of a first time buyer in England and Wales1, a non-smoker and has taken out a mortgage for 30 years. What are the chances of something happening that could stop him from being able to keep up his mortgage repayments?
According to Royal London’s risk summary report2, Bob has a 2% chance of death, a 6% chance of suffering from a critical illness, and a 19% chance of being unable to work for a period of two months or more during the term of his mortgage.
But most mortgages are taken out on a joint basis so this would make the chance of something happening to one of the mortgage holders even greater.
The strange paradox is that far more life cover and critical illness cover is taken out each year by mortgage applicants than income protection.
Protection risk profiling tools like our risk summary report are widely available for advisers to use with their clients. They can be tailored to the specific details of individuals and couples and portray an accurate picture of what can be expected in terms of claims over a period of time.
If you’re not using these risk reports already, it’s something worth considering as they can help clients understand their own risks and what their priorities should be. With the risk of being off work long term so high, our report highlights why mortgage clients need to consider income protection.
Is income protection too expensive?
When you think about income protection, you might also be thinking that it’s usually expensive.
Well, as I’ve alluded to, the risks of going off work sick are usually a lot greater than the risk of dying, so it makes sense that income protection would cost more than life assurance.
But with income protection you have more dials you can turn than other cover types so you can adjust elements of the cover in line with what’s important to the client and their budget. One of the dials you can turn is the term of the cover. The longer the term, the greater the risk and the more expensive it will be.
In our example, Bob could take cover to age 70 with many providers but he could save a lot from his monthly premium if he set his cover to end at age 60 when his mortgage finishes.
Another dial you can turn of course is the amount of cover needed. The more cover you opt for, the more expensive it will be. Income protection does have a maximum level of cover that clients can take out based on their incomes, but do all clients need the maximum amount of cover possible?
How about a level of income that Bob would need to be able to pay his mortgage and most important bills if he’s on a tight budget?
But the biggest dial you can turn to influence the monthly cost of income protection is the payment period. This is a relatively recent innovation but limiting the length of time a claim is paid for can have a significant effect on the cost of the cover.
Looking at Bob, how much would income protection cost him?
Let’s say he applies for £1,000 per month income protection on an indexed linked basis (RPI). He’s an accountant, needs a 13 week deferred period and wants cover for the length of his mortgage which is 30 years.
He decides to opt for a five year payment period, which means any claim he makes would be paid for a period of up to five years.
Cover like this would cost just £13.66 a month with Royal London (correct at 15 August 2019)3.
This solution might not be perfect, but surely some cover for his biggest protection risk is better than none?
The way forward for mortgage protection?
There are lots of people out there with excellent life and critical Illness plans that cover their mortgages and were recommended to them by their financial adviser.
My worry is what are they going to do if they go off work sick at some point during their working life and can’t afford to pay their mortgage each month?
They can’t claim on one of their ‘mortgage protection’ plans because they haven’t died or been diagnosed with a critical illness.
Losing income through sickness and the subsequent inability to keep up those monthly mortgage payments is precisely what that risk warning on the key facts illustration was talking about.
The industry is making great strides to promote the idea of income protection and this is reflected in the amount of cover taken out in 2018 – a big year for income protection sales in the UK4.
Product solutions have drastically improved over the past few years with features and benefits that clients can appreciate and see the value in. It’s also easier than ever to design an income protection solution to make it affordable to any budget.
So when we’re talking ‘mortgage protection’, let’s include some income protection too as part of the protection solution.
If you want to learn more about why mortgage clients need income protection check out our recent webinar on this subject.Sources:
3 Male, non-smoker, aged 31 next birthday. £12,000 Income protection increasing income at RPI. Includes £2.60 plan charge. 15 August 2019.
4 Swiss Re Health and Term watch 2019