When looking at the benefits of mortgage payment protection insurance (MPPI) and payment protection insurance (PPI), the first thing to do is draw the distinction between the two products. MPPI does what it says on the tin – offers mortgage protection – and undoubtedly has many benefits.
Unfortunately the same cannot always be said of PPI, which can be taken out to cover the likes of loans and credit cards. It can be sold with a wide range of products by everyone from electrical retailers to secured loan providers.
The media exposure of selling practices around single premium loan PPI have wrongly tarnished the payment protection sector as a whole. As it stands, the most common form of PPI, single premium PPI, is often too expensive, commission payments are too high and the product lacks transparency.
This view is being reinforced by a number of articles in the press about consumers being ‘ripped off’ by PPI they have taken out to cover the likes of loans or credit cards.
In contrast, MPPI, which has been available in its current format for around 20 years, is fundamentally good and still continues to prove its worth. For example, figures from Omnicheck reveal that 694,000 claims were paid out during the period 2000 to 2004.
MPPI is clearly of benefit to consumers wanting to protect the home they live in – the biggest financial commitment they will make in their life.
Value and transparency
Monthly premium MPPI offers good value for money and is completely transparent. Even the Financial Services Authority (FSA) has drawn a distinction between PPI and monthly premium MPPI, and has said that the sale of the latter appears to comply with its rules.
The first thing any adviser should do when explaining the benefits of MPPI to consumers is to make sure they are clear on how it differs completely from PPI, which is currently under the spotlight.
In today’s economic environment the benefits of MPPI are a vital safety net and it should be seen as a necessity rather than an extra. The most recent figures from the Department of Constitutional Affairs (DCA) on mortgage possession actions entered in the county courts of England and Wales for the fourth quarter of 2005 show a marked increase from previous years.
These figures report how many possession proceedings have been issued and how many orders for possession have been made by the county courts. Since some of the orders made will not have been enforced, they don’t show the final number of possessions but they are an excellent indicator of trends.
In the fourth quarter of last year, the number of mortgage possession actions entered rose by 50 per cent to 31,018 from the same period in 2004. Orders made increased by 58 per cent to 18,784.
Although repossessions are still relatively low compared with levels reached in the 1990s they are undoubtedly on the way up.
Virtually any UK resident may need MPPI at some point to avoid getting to the stage of falling into arrears and consequently being repossessed. When borrowers become ill and unable to work for a period of time, they often recover from the illness but never recover from the mortgage arrears, causing them unending problems when they wish to move and take a new mortgage. A simple, low-cost MPPI policy could avoid this.
Vital precaution
With a lack of assistance from the government to help people with their mortgage payments should they become ill and unable to work, MPPI is a vital precaution.
State assistance has very stringent criteria. For example, if one of two joint borrowers lose their income, they don’t qualify for state help. People are not eligible if they have savings of more than £8,000, and if someone does qualify they have to wait nine months before receiving anything at all.
The reality is that a significant proportion of the UK population could not cope financially for more than one month if their income stopped. Four million people would be on the bread line within a month if they lost their jobs.
Very few employed people can rest assured they’ll never be out of a job for whatever reason. Redundancies are a fact of life and every day people become ill and are unable to work. Mortgage payments are usually the biggest single financial commitment for consumers and they must be able to insure this risk.
Furthermore, consumer debt is hitting record levels in the UK and people are having to stretch themselves to their financial limits to afford a property.
By insuring their monthly mortgage payments, life premiums and the monthly cost of their buildings and contents insurance, consumers can ensure their major financial commitments are protected.
To help consumers protect themselves against the fall-out from an unforeseen life event, we’re looking at how we can make MPPI more relevant to consumers changing lifestyles to protect against unexpected changes.
Another advantage for consumers that MPPI has over such products as income protection (IP) is that MPPI offers more comprehensive cover.
While IP does have an important role to play, it doesn’t offer unemployment cover. In addition, MPPI can fill gaps before IP kicks in (which is often 12 months) and make such cover more affordable.
Intermediary responsibility
Turning to the benefits of MPPI for advisers, one of the key points I’d like to get across is that intermediaries can’t afford to take the risk of not explaining fully the consequences of not having cover to their clients.
I can understand why some intermediaries lack confidence when it comes to selling MPPI. Not only have the recent media stories on how PPI can be a rip-off made advisers wary of broaching the topic of MPPI, but there has also been a spate of financial mis-selling scandals over the years in the media.
The industry has borne the brunt of endowment mis-selling and pension mis-selling – what we obviously want to avoid is the threat of MPPI mis-selling. But intermediaries are leaving themselves open to being sued if they neglect to advise their clients on MPPI.
As I’ve explained, MPPI is a necessity for virtually all consumers and it is part of the mortgage adviser’s duty of responsibility to make them aware of this. Say a client is made redundant and only then do they realise they have nothing in place to protect them, leaving themselves wide open to the possibility of falling into arrears and having their home repossessed.
Their lender will no doubt ask why they don’t have MPPI and question whether this was raised by their adviser. It’s then that the angry and concerned client will come knocking on their adviser’s door.
In today’s litigious society, the adviser should ensure they explain fully the need for MPPI. If the client still declines the adviser should get this response in writing so they’ve covered their backs. Whatever you do, get this ‘no’ on a piece of paper and keep it on file.
Income enhancement
As well as protecting clients, MPPI can be a big enhancement to an intermediary’s income. Figures from the Office of Fair Trading (OFT) state around 6.5 to 7.5 million policies are taken out each year with around £5.4 billion being generated in premiums in 2003.
Intermediaries are missing out on a substantial amount of income by not selling MPPI, or general insurance (GI) products as a whole. We estimate that by not selling GI, intermediaries are missing out on £35,000 or more a year. Over a five-year period, GI accounts for 42 per cent of the total money an intermediary can make from a mortgage sale.
Some intermediaries may be put off selling MPPI because they see it as having a relatively low financial return, but this is not the case over the medium to long term.
A broker may receive a £320 procuration fee from selling a mortgage, around £600 from the sale of a life insurance policy but on average only £75 up-front from selling MPPI.
But if a MPPI policy runs for seven years, the intermediary makes on average £75 each year. Over the life of the policy it therefore becomes a valuable income source, earning on average £525 from just one sale.
Another benefit of selling MPPI is that intermediaries can make the most of the advantage they have over banks in this sector.
Intermediaries can advise on the whole of the MPPI market to offer their clients a choice of competitive products from a range of providers, whereas lenders are restricted to selling their own standard accident, sickness and unemployment cover.
So, MPPI offers numerous and diverse benefits to both consumers and intermediaries. You’d be ill-advised to adversely affect both yourself and your clients by not realising the benefits.
