Lockhart Grey Financial Planning Ltd

A Guide to Mortgage Payment Protection Insurance

Mortgage Payment Protection Insurance is an invaluable insurance product designed to provide financial help in the form of monthly tax-free payments to homeowners who become unable to work due to involuntary redundancy, illness, or accident.  Mortgage cover helps by providing monthly instalments over 12 to 24 months (subject to the provider’s terms and conditions) which help the insured to meet their monthly mortgage obligations.

Mortgages are the most important debt consumers maintain and mortgage protection helps many insured people keep their homes during a time of financial worry and stress.

Mortgage protection insurance is commonly sold in combination with mortgage products by banks and lenders.  This practice has come under fire in recent years because of some mis-selling tactics routinely used.  As a result of the improved consumer awareness, homeowners are recognising the advantages of acquiring mortgage protection insurance from an independent insurance broker.

Mortgage insurance is actually one of three common types of payment protection insurance.  This is a portfolio of insurance products that all provide short-term assistance for unemployed people or people who become unable to work based on protected events.  Along with mortgage protection, the umbrella of payment insurance products also includes loan payment protection insurance and income payment protection insurance.  The core benefits and covers of each payment insurance product are the same, although there are some distinctions in terms of their purposes and features.

Loan payment insurance is very similar to mortgage payment insurance but its purpose is a bit broader in scope: while mortgage payment protection insurance is focused primarily on mortgage protection, loan protection is intended to help assist with growing debt obligations faced by Brits, such as loan and credit card repayments.  It provides cover for most of the monthly loan obligations of the insured as well as often providing a modest income supplement to cover basic expenses.  Loan payment cover and mortgage payment protection are both commonly sold in combination with loan products.  In fact, this packaging of products by banks and lenders has come under intense scrutiny.  This is not because of the process itself, but the tactics used.

Some banks and High Street lenders have controlled the payment insurance industry for years be pressuring or deceiving unknowledgeable consumers into taking on their expensive mortgage cover and other payment protection insurance products.  Lenders sometimes pressured borrowers into believing their insurance was required in order to secure the desired loan.  Others have been more deceptive and build premium costs into the loan repayment costs with only a mention in the fine print of disclosure documents.  Many consumers that currently have payment cover are unaware because it was not directly communicated to them.  The benefit to the seller is that by packaging expensive premiums into repayment costs, they can hide their expense by spreading it out over the length of the loan.  It shows up as a more modest add-on to monthly consumer payments.

The third type of payment protection is income payment protection.  This type of protection seems fairly simple to understand in terms of its purpose.  It is designed to offset a portion of the income lost during brief unemployment periods.  It does not replace the entire lost income, but it does replace a significant portion of it.

There is some confusion at times with the income payment protection of the payment protection portfolio.  This confusion results largely from its names and terms being used synonymously with a complete different product, income protection insurance.  Income protection insurance is a higher cost, longer-term product that pays benefits up until retirement at times and typically covers incapacity only.  Again, because they are sometimes referred to by the same names, consumers become confused.  The income payment insurance is part of the short-term payment cover umbrella.

Consumer advocate groups, such as Citizen’s Advice, have been working to make consumers more aware of how the payment insurance industry operates.  They recently brought a super complaint to the Office of Fair Trading (OFT) to point out that consumers faced an unfair situation in the payment protection industry.  Along with the unfair selling tactics used during product packaging, the group also charged that some sellers were selling products to consumers ineligible to collect benefits.  Part time employees, retired people, and people with pre-existing medical conditions were in many cases being sold payment cover.  None of these groups could collect benefits based on common exclusions of payment insurance plans.

As a result of the complaint, the OFT and the Financial Services Authority (FSA) conducted investigations in the industry.  The FSA imposed severe fines and sanctions on banks and High Street lenders it found to be using unfair selling practices.  The OFT appointed the Competition Commission to perform further research and they are currently looking at the sector.

The best benefit to consumers of the complaint and the publicity surrounding payment insurance has been more familiarity with payment cover and an understanding of the advantage of buying mortgage payment protection insurance and other payment cover on the open market through an independent provider.  Many consumers are still unaware they can even buy protection separate from loans.  They have long been trained to think this is the point that payment cover is purchased.

There are many advantages of working with independent insurance specialists.  With their premiums generally 40 per cent less expensive for mortgage payment insurance and 80 per cent less for loan cover than rates offered by leading banks and High Street lenders

A mortgage protection quote, income payment cover quote, or loan protection quote is easy to obtain by going online. In the case of British Insurance, for example, you simply select how much cover your wish to protect and which events (eg accident and sickness; employment or all three) and the cost will be displayed.

It couldn’t be simpler or cheaper to protect your mortgage repayments and have complete peace of mind, that should disaster strike in the form of unemployment or the inability to work, you will not be financial distress and that your mortgage payments are maintained.