MPPI and IP - Combine to make the perfect mortgage protection package Many believe that when it...
Many believe that when it comes to protecting the monthly mortgage payment you need either short-term mortgage payment protection insurance (MPPI) or long-term income protection (IP) with few choosing to take out both.
Out of the two MPPI enjoys much greater penetration, mainly because it is the preferred 'lead' product offering of many lenders and mortgage advisers when it comes to protecting the mortgage payments. There are a number of reasons for this;
• MPP can usually be sold at the point the mortgage is arranged, regardless of the distribution channel used, whereas other products such as IP, decreasing term insurance and critical illness cover have traditionally been sold during a fact-find process, within the PIA regulatory environment. But not every new mortgagee will choose to undergo a full financial review therefore a potential sales opportunity is often lost.
• MPPI is a straightforward product that addresses a specific need, the mortgage payment. Product choices aren't really required.
• MPPI has a simple sales process, with the application requiring minimal information and often forming part of the mortgage application form.
• Applicants for MPPI aren't medically underwritten, as a pre-existing conditions exclusion applies for a defined period. Therefore there are no potential underwriting delays and all mortgage applicants are usually eligible to apply
• MPPI can cover unemployment, as well as illness or injury. Unemployment is often easier to relate to than the likelihood of incapacity.
• It is single rated, one premium rate usually applies for all customers
MPPI's success has therefore resulted from an efficient sales process that addresses a specific need at an opportune time.
With mortgage lenders under continued pressure to meet the Council of Mortgage Lenders (CML) target of 55% MPPI penetration on new mortgages, the focus put on selling MPPI is likely to increase.
A typical MPPI policy with a 12 month benefit payment period will cost around £5.50 per £100 per month benefit, plus IPT. Examples of cost: see Table 1 above.
However the emphasis put on selling MPPI and the success it enjoys shouldn't be a deterrent to Financial Advisers selling IP, because MPPI alone doesn't provide comprehensive mortgage protection and still leaves your clients homes at risk:
• MPPI is designed to cover the mortgage payment, not help maintain standard of living
• Benefit is only paid for a limited term, usually 12 or sometimes 24 months
• No rehabilitation benefit is paid to support partially incapacitated claimants and little or no assistance is given to aid recovery
• The contract is annually renewable, so the terms of the policy can be reviewed of cover cancelled in the future.
So why add IP?
Most people accept that a period of unemployment is likely to be short-term, and therefore probably adequately covered by an MPPI policy, however the same cannot be said of a period of incapacity.
IP can therefore be positioned as an up-sell opportunity to those clients already holding MPPI cover, extending the scope of their cover and providing them with a comprehensive mortgage protection package.
With the recent introduction of a 56 and 112 week deferred period under some IP policies, the benefit payment period can now dovetail an MPPI policy perfectly. Historically an IP policy with a 52 week deferred period was utilised to achieve this leaving the Adviser having to explain to their client why there was an awkward overlap in benefit payments under the two policys.
Long-term income protection cover provides considerable additional benefits:
• IP can provide a benefit level, in excess of the mortgage and associated costs, sufficient to help maintain standard of living throughout the mortgage term or until retirement. This ensures that the home is protected permanently, not just during short-term incapacity, and that other assets aren't put at risk. For some people protecting their major assess, the home, during short-term incapacity will be sufficient for them to get by financially, however a higher level of income is usually required should incapacity become longer-term.
• Because of the potentially huge benefit payments that could be made over the term of an IP policy some insurers are very proactive in supporting claimants in their rehabilitation and will sometimes be prepared to assist before their benefit liability arises. This means an MPPI claimant who also has IP cover could benefit from support that the MPPI insurer is unable to provide.
• IP provides long-term security, no matter how many claims you make, because the terms and conditions cannot be changed.
• IP benefits can be indexed to ensure the true value of the cover isn't eroded over time.
• IP provides the flexibility to allow the cover to be increased following a house move or home improvements.
The addition of an IP policy can often be achieved at relatively low cost. The examples in the tables above shows the cost of adding IP with a 56-week deferred period and a 25-year term for a male, non-smoking office worker: See Table 2 above.
The added benefit of taking out IP on a longer deferred period, ie. 56 or 112 weeks, is that medical underwriting is less likely to be a barrier to taking out the cover, as the underwriters would only be concerned with existing conditions that could result in long-term incapacity
With 125,000* loans made for house purchase in June 2001 alone, 45% to first-time buyers, the opportunity to sell MPPI and IP in conjunction with mortgages is clear to see.
[* Source: Council of Mortgage Lenders]
Nick Homer is product marketing manager for
IP at Norwich Union Healthcare
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