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 Protection selection from Complete guide to Homebuying October 2002 Certain insurances are vital for borrowers and, as Graham Norwood explains, it's important to get the right combination With low interest rates and rising house prices it is tempting to ignore insurance to cover your mortgage payments in an emergency. But because borrowing is cheap and prices are high, the value of the average mortgage has soared. According to the Council of Mortgage Lenders (CML) the average first time buyer borrows £83,406. For existing owner-occupiers the figure soars to £89,769. In London, says the Nationwide Building Society, first-time buyers pay an average of £156,098 for a home. So could you keep up mortgage payments for this scale of borrowing if you suffered long term illness or suddenly lost your job? It's an important question. “The government cut income support for mortgage interest benefit in 1995 for homeowners who can't meet mortgage payments through job loss or other circumstances," says David Farrington of the Norwich & Peterborough Building Society. "That means 70 per cent of people with mortgages don't qualify for help with payments. Even those who do won't receive a penny for the first nine months.” With little state help available it seems insurance to cover home loan payments is not a luxury but a necessity. There are four insurances normally associated with mortgage cover. It is unlikely you will want to take all of them so consider which ones best suit you. 1. Life Insurance The most popular type of policy is term cover. This covers your life for a set period (usually the same length of time as your mortgage term) so if you die during the term there will be a pay out which will cover your mortgage debt. If you are still alive at the end of your chosen term you will not receive a pay out. If you have an interest-only mortgage you will probably want “level term insurance”, so-called because the size of the potential pay out remains level. A £60,000 level term insurance policy will pay out £60,000 whether you die on the first or last day of the policy. If you have a repayment mortgage you could choose “decreasing term insurance” where cover reduces in line with the mortgage. Should you die during the term, the pay out will cover only what you have left to repay on your mortgage. It is always worth reviewing life assurance policies regularly to check your deal. Mortality rates are extremely accurate so life companies can compete heavily on price. For example take a non-smoking couple (male 35, female 32) wanting decreasing term assurance to cover a property currently valued at £125,000. Legal & General offers a highly competitive deal with a “fixed” monthly premium of £12.84 covering both individuals; Scottish Provident’s premium is higher at £14.02 but that sum is reviewed periodically in the light of the most up-to-date mortality statistics. 2. Critical illness cover Critical Illness policies cover you if a specified illness leaves you unable to work. “Eligible illnesses” are always specified in the insurance contract - different firms cover different illnesses and have different exclusions, so always check. Most policies cover around 20 conditions including blindness, cancer-related illnesses and sudden traumas such as heart attacks and even burns. However more and more lenders insist claimants take a test to satisfy the company of the scale and the illness and its effects. These policies are more expensive than life cover and the price can be influenced by your health and personal circumstances. For example a family history of heart disease means premiums are often loaded. 3. Income protection The property and finance industries usually refer to this as Permanent Health Insurance (PHI). The policy is designed to replace most of your income if you cannot work due to a long-term (but not permanent) illness or accident. However it does not cover redundancy. Each policy has a “deferment period”, which is the delay between the start of the illness and the first monthly payment - the longer the period, the cheaper the policy. Most employers pay staff for at least three months in the event of a major but temporary illness, so many policies will pay out from the fourth month onwards. There are plenty to choose from including some that make immediate payments which may be more useful to self-employed homeowners. However no insurance will pay 100 per cent of your income and few policies go above 60 per cent. This restriction is designed to prevent claimants being tempted to stay away from work any longer than necessary. For a man in his mid-40s earning £24,000 a year, Bradford & Bingley has a scheme paying around 60 per cent of income in return for a monthly premium of £57.33. The policy has a 30-day deferment period and will only pay out for 12 months. Online finance firm www.protectyourearnings.co.uk has a package paying roughly the same proportion for £52.65 a month, but with a 60-day deferment. If you increase that premium to £58.50 you still have to wait 60 days but the pay out lasts 24 months. 4. Mortgage Payment Protection Insurance (MPPI) or ASU These policies cover your mortgage but not your general income and are most useful if you fall sick on a long-term but temporary basis, or if you are made redundant. They pay out for a maximum of 12 months but again have a “deferment” period and almost all calculate their premiums on a fixed sum per £100 of mortgage - for example, the Norwich & Peterborough’s Safeguard policy costs £5.80 per £100. The Bradford & Bingley pays for 12 months for a typical claimant in his mid-40s, but payments start 30 days from the date of the claim. On a £400 mortgage its monthly premium is £19.60. Rival firm ABG has a smaller premium of £18.20 for £400, but the deferment period is 60 days. Some experts criticise MPPI policies. James Rodea of Hamptons International, an estate agent that now offers mortgage insurance to buyers, says: “They only pay out for a maximum of 12 months and I believe rarely represent good value for money”. He advises income protection cover or a longer-term insurance. Whichever route you take, the only sensible option is to buy at least SOME insurance. A survey by debt protection firm CPP Group says 36 per cent of homeowners regard mortgage debt as their biggest financial worry. “While people are over-extending themselves to afford inflated house prices in the short term they are running the risk of not being able to service such debts in the future” warns CPP’s Brendan Kiem. “People should take a good look at their monthly expenditure - and allow for the unexpected." 
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