With mortgage costs rising and job losses now expected in the financial services and other sectors, as the economy slows, homeowners are being advised to protect themselves against loss of income.
But homeowners need to ensure they buy the right type of cover.
Mortgage payment protection insurance (MPPI) is the only product that will directly protect against redundancy. It is a form of accident, sickness and unemployment insurance (ASU). But it is not to be confused with the other type of ASU – payment protection insurance (PPI), which is sold alongside debt-based products such as loans or credit cards and does not cover mortgage repayments.
MPPI is often sold by mortgage providers together with a mortgage. It will match mortgage payments in the event of job loss or ill health. But it comes with serious restrictions, financial advisers warn. It only pays for 12 to 24 months of redundancy and has a number of exclusions.
Matt Morris, policy adviser at protection specialist Lifesearch, says: “We’d only recommend MPPI for redundancy if you’re really worried about it as the exclusions can be so high.”
Income protection insurance (IP) is a different type of product but only protects against illness – although it is more comprehensive than MPPI for illness cover. For example, Morris says that the two main causes for claiming on an IP contract are stress or back pain – but these are not covered under most MPPI policies.
A simpler alternative, he says, is to hold an emergency fund – for example, in cash ISAs – to cover redundancy while taking out an IP policy. An emergency fund will still be needed in any case with an MPPI contract, as most do not pay out for the first month or even first two months of illness or unemployment.
Morris warns: “People could panic and buy an MPPI product that they don’t need. This is one of the worries with the influx of people wanting new mortgages.”
And he adds that with an unadvised sale – which MPPI sales tend to be – a more suitable alternative for the individual will not be suggested.
Cost is another consideration. Perhaps surprisingly for a product with fewer exclusions, Morris warns that MPPI can often be more expensive than income protection if the policyholder is relatively young and in good health. This is because income protection lowers its rates for younger, healthier people, while MPPI tends not to, because of the shorter length of time it pays out.
For example, for £1,000 a month of cover for a healthy, non-smoking 35-year-old, MortgageProtect charges £18.20 a month in premiums for both men and women for MPPI. Pioneer Friendly Society charges £16.62 for women for IP, and just £13.25 for men for IP.
Nationwide offers MPPI premiums of £58.91 a month, also for £1,000 of cover. This is based on 12 months of cover with a one-month delay. It is also possible to get 24 months of cover with two months’ delay, which puts the premiums up to £69.93 a month. This is significantly higher than the previous examples.
Nationwide points out that unlike some providers its MPPI does cover stress and back pain. But the small print on unemployment is worth noting – the policy will not pay out if a person loses his or her job in the first two months of cover.
Another point to bear in mind is that anyone with a good reason to fear redundancy will not be able to get cover anyway. Policies do not pay out if, for example, a company has announced that it will be making 20 per cent of its employees redundant. However, general fears about the economy are deemed too vague to count as an exclusion.