Unemployment leads to the loss of 30,000 homes a year, affecting more than half the population at so...
Unemployment leads to the loss of 30,000 homes a year, affecting more than half the population at some stage in their lives, and there is still a misconception that the State will provide help. As a result, the unemployment insurance market has huge potential, but as yet there has been little participation from IFAs.
Over the years, unemployment insurance has suffered a bad press. But fortunately, the historical view that the product is expensive, offers limited cover and is hidden behind a wall of small print making it unlikely ever to pay out, is increasingly inaccurate.
The combination of the low level of state benefit support, the initiative by the ABI and the Council of Mortgage Lenders (CML) to standardise product features and the growing number of products with unemployment insurance as an optional rider benefit means there are now new opportunities emerging for insurers and IFAs.
Unemployment insurance has been available in the UK since the early 1960s. It is usually included as one of the benefits on an accident, sickness and unemployment (ASU) product. The main markets include covering payments for personal loans, motor finance, credit cards and most importantly for IFAs, mortgage repayments. In recent years ASU policies have become available unbundled, for example 10% of mortgage-related products cover unemployment only.
Unlike income protection insurance, unemployment cover does not look to replace salary. The highest amount of cover generally available is set to be equal to the mortgage repayments. Higher levels of cover are not offered due to the problem of managing claims. For example, if a client's income from an unemployment insurance policy were similar to their salary before they became unemployed, there would be a significant reduction in the incentive to find a new job, increasing the cost to the insurer.
In the absence of viable income protection unemployment products, the mortgage-related unemployment cover market is the one that offers opportunities for IFAs.
To qualify for benefits under a policy, a policyholder would typically need to be made redundant through no fault of their own or sacked for reasons other than misconduct.
Different rules apply for contract workers reaching the end of their contracts who would only be covered if the contract had either been in force for at least two years or had been renewed at least twice. The self-employed would qualify if they had involuntarily ceased trading and declared this to the Inland Revenue.
A general condition for qualifying for benefits is that the claimant has registered for Job Seekers Allowance. Needless to say, cover is not offered in respect of impending unemployment that the claimant was aware of at the time the policy was taken out.
This complex pattern of eligibility for benefits seems to support the criticism that unemployment insurance is all small print.
However, in February 1999 the ABI and the CML published a baseline specification for cover purchased by borrowers. This highlighted a minimum set of standards that policies are expected to meet and aims to ensure products exceed basic quality thresholds in areas such as eligibility for cover, payment of claims, exclusions and treatment of pre-existing conditions.
One consequence of this is already becoming clear. The most recent claims statistics show that 86% of claims under ASU plans in the second half of 1999 were accepted. This is a figure that compares well with critical illness and income protection and suggests this is a type of cover can be recommended by IFAs with greater levels of confidence.
Unfortunately, the State does not provide a solution. Job Seekers Allowance for a single person is only £52.20 per week and there is no help with mortgage costs for the first nine months of unemployment. If your partner is working, or you have more than £8,000 of savings, then you may not qualify for assistance. Overall, more than 70% of people will not qualify for assistance.
In the UK, there are almost 11 million mortgages. The CML commissioned research into the number of mortgage holders who would have resources to tide over the loss of a sole or main income for 12 months. It found that only 50% had sufficient wealth, either through savings or a second income, to be able to do so. Of the 5.5 million people without adequate resources, over three million do not have unemployment insurance in place. This presents a massive opportunity for IFAs.
For once, the insurance industry has the Government on its side. Hilary Armstrong, the Housing Minister, said: "Homebuyers need better, more effective insurance to protect their mortgage payments against unforeseen periods of financial difficulty caused by problems such as accidents, sickness and unemployment." The Government has set a target of increasing the take-up rate to 55% of all mortgage holders by 2004.
Even better news for IFAs is the Government's attitude to advice. Armstrong said: "Everyone with a mortgage or applying for a mortgage should consider carefully whether mortgage payment protection insurance is suited to their needs and circumstances. If it is, they should shop around for a policy that best suits their needs and offers value for money. As with purchasing all financial products, home buyers should seek professional information and advice."
IFAs are well-placed to take a broad view of a client's financial position and find the best value solution.
The appetite for this product among customers appears to be growing. In the second half of 1999, 28% of new loans were sold with mortgage payment protection (ASU), up from 24% in the previous six months.
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