How often have you read the warning, 'Your home is at risk if you do not keep up repayments on a mor...
How often have you read the warning, 'Your home is at risk if you do not keep up repayments on a mortgage or any other loans secured on it'?
How often have you dismissed it as merely another necessary item of legal small print which has to appear on all sales material relating to house purchases? It is easy to ignore this statement, but for any IFAs planning to develop their protection business it is perhaps one of the strongest sales messages there is.
According to a recent Mori poll conducted for Scottish Provident, mortgages in the UK are hugely under protected. It revealed that 39% of people with mortgages have no life cover. Why is this? It could be as a result of lenders no longer making it a requirement that clients take out life assurance to cover their mortgages. While this is not a problem if the client is single and has no dependants, because on death the house could be sold to repay the lender, if the borrower has a family, lack of adequate protection could leave the family in a serious financial situation.
The survey also showed that 74% of mortgage holders do not have any critical illness cover and 84% have not taken any income protection to help them meet their monthly payments if they cannot work due to sickness or an accident.
This lack of protection is likely to worsen as the endowment market recedes because an unfortunate side-effect of the demise of the endowment is the loss of life cover which is included automatically with an endowment. And because many modern endowments also included critical illness cover, a move away from them could mean that fewer people will get essential protection for their mortgages.
Rather than mourning the passing of the endowment IFAs can look forward to the huge opportunities that exist to write profitable protection business to cover the new breed of flexible mortgages.
Traditional repayment mortgages are being replaced by the flexible mortgage, where capital and interest is paid each month and, in addition, the borrower can sometimes repay chunks of the mortgage when possible and draw down further loan funds later on.
The IFA opportunity is to ride on the back of these flexible mortgages and start recommending the new generation of flexible 'menu of benefits' term.
Traditional mortgage term assurance decreases at the same rate as the mortgage is repaid and there is little flexibility. But modern term assurances allow cover to be increased, decreased or kept level according to the balance remaining in the flexible mortgage. Clients could reduce the cover if they pay off a chunk of the mortgage or could increase the cover if they borrow more.
Most importantly, these modern term assurances also allow clients to select more than a simple death benefit to protect their mortgages. They include critical illness cover, disability income benefit and unemployment benefit. Including these important protection covers in the sale is the key to giving the client the comprehensive mortgage protection they need and to increasing the IFA's own income at the same time.
For example, consider a new mortgage client with a repayment mortgage of £75,000 over 25 years. There is little advice required if the only protection benefit being considered is death benefit, because the cheapest premium on the CTP, or on the internet, usually wins. It is a price-driven sale.
These days death benefit is not enough. Clients, with their IFA's advice, should be looking beyond death benefit to critical illness, disability income and unemployment benefit. This is the chance to move away from the price-driven sale to an advice-driven sale.
Why not provide £75,000 of decreasing death and critical illness cover coupled with £500 per month of disability income cover and £500 per month of unemployment benefit.
This package would be individually tailored for the client - a package that they would not be able to get from direct writers. This is comprehensive mortgage protection and it is advice driven.
A good way of reinforcing the concept of comprehensive mortgage protection in the minds of the client is to compare it to car insurance. Nobody ever takes out the legal minimum of third party only. Few people would even consider third party fire and theft.
Most people go for fully comprehensive. Death benefit is the equivalent of third party only - but remember that nearly 40% of people do not even have that to protect their mortgage.
IFAs should start their mortgage protection discussions at the fully comprehensive level rather than just starting with death benefit and then adding the other benefits during the course of the discussion. Even if a client cannot afford all the protection benefits, modern flexible term assurances can be upgraded later on to include benefits missed off at the start.
The advantage of beginning the sales presentation with the complete package is that the client understands that this is the optimum protection package for his mortgage and knows that this can be set up immediately or when they can afford it in future. This is also advantageous for the IFA because it provides the foundation for a long-term relationship with the client.
Over the past few years IFAs have been selling death benefit, or death and critical illness benefit (either through an endowment or through a term assurance) to protect their clients' mortgages but it is the lender who may have written an accident, sickness and unemployment (ASU) policy for the client when they signed up for their mortgage. The client may have felt that the cover was part of the conditions of the mortgage.
It is very important for IFAs to make sure that their clients are aware that their lenders' ASU plans are not compulsory and that they have a choice.
A combination of disability income and unemployment benefits can offer a better level of cover.
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