The dark side

Single premium mortgage payment protection insurance may form only a tiny part of the home loan protection market, but it generates a disproportionate level of controversy.

While regular monthly premium products are enthusiastically promoted by government, insurers and lenders, the single premium model is shunned by many. Its more vehement critics argue that the product should be driven into the protection wilderness with those who sell and promote it.

Single premium MPPI has many similarities to its more popular regular premium sibling. It is designed to cover the monthly mortgage payment and typically pays benefits for up to 12 months if the policyholder makes a successful claim for accident, sickness or redundancy.

Premiums are quoted on a flat rate for £100 of mortgage and there is no individual underwriting. Benefit levels and exclusions are also similar.

The key policy difference is that the single premium covers the first three or, more usually, five years of payments and is paid in a lump sum upfront. The cost is generally added to the mortgage and repaid over the life of the loan.

Companies which sell single premium MPPI, mainly standalone providers such as Bennett Gould, Centrepoint Insurance Services, several Lloyds brokers and wholesale underwriting agency Barclay Alexander, usually sell the regular premium contract as well. Lenders generally stay clear of the single premium product, arguing that the regular premium model fits neatly alongside the monthly mortgage repayment.

Single premium MPPI can generate fierce passions. Simon Burgess, managing director of standalone MPPI provider Goodfellows, won&#39t touch it with a bargepole.

“We don&#39t offer single premium MPPI, we believe it is a highly questionable product that is only really sold by the most unscrupulous and dubious brokers.”

He says it is almost never sold by independent financial advisers, who are regulated and know they have to keep their hands clean.

“Only unscrupulous mortgage brokers and people not obliged to give best advice, such as unregulated general insurance brokers or mortgage brokers who can&#39t get professional indemnity cover, get involved with this product.”

Burgess says these brokers select their clients carefully.

“They target unsophisticated clients, normally those exercising the Right to Buy on their council house, and sell them a three or five-year lump sum contract. These clients are not the most sophisticated buyers of financial services and can be deluded into buying inappropriate policies. Some end up paying for three years&#39 cover over their full mortgage term, which means they are paying for protection more than 20 years after it has expired.”

So why would anybody sell such a contract? Burgess says the answer is simple and insidious.

“Commission on single premium MPPI can be as high as 70% or even 80% of the initial premium. Since the premium covers five years, this can produce a hefty lump sum. It is scandalous, a total rip-off and unacceptable under any circumstances.”

If clients want premium security, Burgess recommends guaranteed MPPI contracts, which cost slightly more but guarantee premiums remain steady for three or five years.

“They cannot be cancelled by the insurer, the client is free to cease premiums and commission doesn&#39t top 25%. There is no excuse for a broker taking more than 25%. If somebody is drawing 70-80%, you can draw your own conclusions. Our commission is 10%, we can make a living on that.”

Neil Thomas, director of independent financial advisers Simpsons of Brighton, isn&#39t quite as vehement as Burgess, but single premium MPPI still causes him “extreme concern”. His main worry is that the client is tied into cover for a typical period of five years. “During that time, their individual circumstances can change massively. A key duty of a financial adviser is to regularly review clients&#39 finances annually at the very least, and make adjustments where appropriate. You can&#39t do that with this policy.”

Employment status can rapidly change and cover should have the flexibility to change with it, Thomas says. “Somebody working in IT, for example, could switch to a self-employed contract. One of my clients recently switched from a job in private industry to local government, and her new position came with extensive accident and sickness benefits. I had previously sold her a regular monthly MPPI contract and we could adjust this to meet her changing needs. With a single premium contract, she would have paid dearly for unnecessary benefits.”

Thomas says a regular premium contract also allows the client to respond to newly-launched MPPI or other protection products. “If a more competitive product comes onto the market with cheaper premiums or better terms and conditions, the client has the flexibility to switch. Similarly, if the policyholder decides to purchase critical illness cover or income protection, they may need to alter their MPPI to reflect that.”

Adding the cost of cover to the value of the property is particularly dangerous in an overheated housing market, where people will be stretching their finances to get on the property ladder. “This increases the homeowner&#39s overall borrowing and reduces their equity in the property. Anything that narrows the difference between the mortgage and the value of the property can&#39t be a good thing, particularly if the homeowner has already borrowed heavily. It leaves them more vulnerable to negative equity if prices do fall back.”

Like Burgess, Thomas also identifies the higher immediate commission on five-year policies as the main driver of inappropriate sales.

“The prospect of earning a high lump sum premium will tempt brokers to push this product, regardless of their client&#39s circumstances.”

Both men hope that regulatory changes will help clear matters up, driving unregulated general insurance brokers and mortgage brokers from the market. Burgess pins his hopes on the new Mortgage Code and Compliance Board fitness and competence requirements, which brokers should have met by the end of December 2002 to continue offering unsupervised advice.

“Single premium MPPI ought to be stamped out, there is no valid reason for it. Hopefully, that will start to change with the new mortgage regulatory requirements,” he says.

The MCCB doesn&#39t directly regulate MPPI, although a spokesman for it said it does have an interest in how the product is sold, as with all mortgage-linked insurance products, and its Code requires the product to be adequately explained in terms of customer understanding. It is due to examine all aspects of MPPI this year as part of its regular reviews of the industry, rather than in response to specific complaints.

Thomas is looking towards October 2004, when regulation of companies selling general insurance including MPPI will come under the Financial Services Authority as a single regulator. At that point, regulation will become a statutory rather than voluntary requirement and it will be a criminal offence to sell this product without FSA regulation.

“Many brokers selling single premium MPPI aren&#39t members of the General Insurance Standards Council and many of these won&#39t want to make the regulatory jump to the FSA. They are likely to withdraw from selling general insurance altogether, including single premium MPPI,” he says.

This is welcome but could spell bad news for clients who have recently been sold single premium cover. “It could leave them high and dry for the remaining years of their contract, with no help or redress from their broker if they have a problem with the policy,” Thomas says.

But is single premium MPPI – and are the companies that sell it – really as bad as the critics claim? Product providers stand their ground, arguing that the single premium contract remains valid for certain categories of homeowner.

John Plackett, operations manager of standalone MPPI provider Bennett Gould & Partners, claims single premium policies make up a tiny and shrinking proportion of its business, but it remains a valid niche and it will continue to offer the single premium option as long as the demand from brokers is there. “Unless the FSA decides it isn&#39t something that it wants to be associated with and gets rid of it, I see no reason why we should stop selling this product, or why we can&#39t still be selling it in five years&#39 time,” he says.

Critics claim that tying homeowners to a five-year contract would harm, say, a married couple who separated shortly after and bought separate policies. Plackett claims this wouldn&#39t cause problems with the Bennett Gould contract. “It is a fully portable contract, if you move house it carries onto the next mortgage. On a joint policy, both policyholders will continue to be covered for the same amount, although they can&#39t both claim at the same time.”

He also dismisses arguments that homeowners will be disadvantaged if they switch to a job with better accident and sickness benefits. “We will still pay in the event of a claim, so all that has happened is that they are getting a greater degree of mortgage cover.”

Bennett Gould pays a flat 20% commission on both single and regular monthly premium products, which doesn&#39t skew brokers towards either product. “The single premium may seem more attractive, because the broker gets the commission straight away, but it really pans out over the term.”

Bennett Gould also sells direct to customers, without advice, but Plackett says almost none elect to pay the single premium. “I can&#39t remember the last time a direct customer bought single premium MPPI, the vast majority prefer to pay a monthly premium. This is much more affordable, allowing them to budget and pay by direct debit, like their gas or electricity bill. Almost every single premium sale comes from the small number of intermediaries who prefer to take this option. Most policies seem to be sold to council tenants exercising the Right to Buy, although I&#39ve no idea why. We don&#39t research our brokers&#39 sales policies.”

Standalone MPPI provider Centrepoint Insurance Services sells the single premium version as well the regular contract. ASU supervisor Maurice Keenan says it makes up less than one in 50 of sales, but the figure is starting to rise. “We never used to sell a lot of single premium policies, but they have become increasingly important in the last four to five months, with council tenants buying their own properties choosing to protect their mortgage with a five-year product. This gives them the security that their premiums will not vary during the term, something regular monthly products can&#39t guarantee.”

He claims the Centrepoint single premium policy offers more generous terms than the typical regular monthly policy because it offers benefits either for a maximum of 12 months or the remainder of the policy term, whichever is greater. “The payout could last as long as the policy, which means if the holder claims shortly after setting up cover, they could potentially received benefits for nearly five years. If they claim, say, six months before the policy expires, they will still get up to 12 months&#39 worth of benefits. Brokers should check carefully in policy small print, because not every insurer offers this. By the end of the term, the homeowner could only have one or two months&#39 worth of cover, despite having paid full premiums.”

Lengthy payout is one reason why the single premium policy is more expensive than Centrepoint&#39s regular monthly contract. “Our single premium policies are more costly, we charge £7.25 per £100 plus IPT, compared to £4.95 on our regular premium contract, which offers 12 months&#39 benefit, or £5.50 for 18 months&#39 benefit,” says Keenan.

The commission paid to mortgage brokers is also higher. “We pay 40% of the net amount on single premium cover, which is a tidy sum for the agent. On the regular premium contract, they can earn either 30% of the net monthly premium every month, or 25% of the net monthly premium for the first 12 months upfront, followed by 25% ongoing commission.”

Despite the clear financial advantage for the broker of selling a single premium policy, only a “very, very small proportion of our agents” choose this option, Keenan says. “It can be a big sum for the client to pay upfront, most blanche a little bit when asked to pay, say, £1,500 in one go.”

Despite the five-year tie-in, Keenan says Centrepoint&#39s policy is portable and flexible. “You can change the contract as circumstances change, you can even cancel it halfway through and receive a pro-rata refund. Policies that don&#39t offer this cancellation option are unnecessarily restrictive.”

Geoff Hall, general manager and director at wholesale underwriting agency Barclay Alexander, which designs, distributes and markets MPPI policies, also argues that single premium policies have their place. “The vast majority of our policies are monthly premium, renewable contracts, but we do offer one five-year single premium contract, Securityplus, which comes with a monthly renewable option thereafter.”

He admits that single premium contracts have their faults. “The downside is that the premium must be paid upfront rather than monthly, and the expense puts many people off. Another drawback is that some contracts don&#39t have a refund option if the client wants to cancel during the term. Finally, many are accident, sickness and unemployment only, which means that if you are self-employed, for example, and unemployment cover is irrelevant, then tough, you can&#39t remove that element. Contracts shouldn&#39t be all or nothing, clients should have a choice.”

When launching its product just over a year ago, Hall says Barclay Alexander tried to eliminate all these problems. “We wanted to get the product right. Our clients can choose to purchase unemployment cover only, or accident and sickness only, if it suits them. Most importantly, our policy offers a proportionate refund, providing there hasn&#39t been a claim.”

Hall says single premium contracts have several inherent advantages for the right type of client. “The premium is guaranteed for five years and the underwriter cannot change that rate or cancel the contract for any reason except liquidation. If its claims experience gets worse, the client is still protected, whereas with a regular monthly premium the underwriter can cancel the contract, increase the rates or introduce new terms on a whim.”

He acknowledges that this option won&#39t suit everybody. “We are GISC members and only want to sell this type of product where suitable, such as to those who want long-term stability and a policy that will run for five years. The vast majority still choose regular monthly premiums.”

When examining single premium plans, Hall says brokers should check whether the policy pays more than one claim. “The maximum length of any individual claim on our policy is 12 months. After a claim has been made, our policy will continue to run for the rest of the term and the holder can make further claims if necessary. Some policies may only allow one claim within the term. Similarly, we will pay benefits up to 12 months, where appropriate, even if you claim in the last few months of the policy.”

Hall says there is only a minor difference between the premiums on Securityplus and Barclay Alexander&#39s regular monthly contract, Safetynet. “On the five-year policy, we charge three times the monthly benefit. Somebody wanting £1,000 cover would therefore pay £3,000 upfront, which works out as £50 per month during the term. Regular monthly premiums, by comparison, cost slightly less at £47.30, but this figure isn&#39t guaranteed, and could increase at any time during the next five years. Providing the salesman explains that the £3,000 will be spread out over the cost of the mortgage term, there can&#39t be any accusations of mis-selling or problems on the moral side.”

Commission on the single premium contract is 30%, with a proportionate clawback if the client requests a refund. Commission on the monthly premium contract is 25%. “Many single premium contracts pay commission of around 40% to 50%, and we undoubtedly lose business by not matching those rates, but we would not be comfortable charging that much, because the client is important to us. Our industry will be regulated by the FSA from 2004 and disclosure of commission will inevitably follow. We don&#39t want our clients to be outraged to discover exactly how much of their premium is going to their broker,” Hall says.

While some standalone providers are happy to sell single premium contracts, many remain distinctly sceptical and steer clear of this market.

Standalone provider Premier Writers offers a range of mortgage-related ASU policies through intermediaries and estate agency chains, but will only accept premiums on a monthly basis. Sales and marketing manager Kevin Milliken says monthly premiums make a lot more sense than a large, upfront sum. “Clients aren&#39t tied in for five years, they are in a monthly contract and can cancel this at any time. They could cancel after six months, say, if they change their mortgage and switch to a policy with higher or lower premiums. They are not locked in and don&#39t have to worry about a rebate.”

Broker and MPPI provider Sterling Hamilton Wright also steers clear of single premiums, says schemes manager Michael Buse. “We only offer monthly schemes, it is a lot safer to do MPPI on that basis. Over five years, it is very easy for the client to get out of touch with what their policy is offering and end up with the wrong cover limits. Mortgage rates go up and down all the time. Protection needs to reflect that and we are determined to keep our policies as transparent as possible.”

The Mortgage Business has let the single premium option in its direct-to-customer Mortgagecare policy wither and die, says managing director Bill Dudgeon. “I can&#39t remember anybody taking it. The single premium option is simply tucked away in the conditions of the product and we don&#39t promote it. We feel that to debit quite a large sum upfront isn&#39t the thing to be doing.”

Instead, the company concentrates on its five-year guaranteed monthly premium product. This pays commission of 60% of the first year&#39s premiums, with 36% paid upfront and 24% over the next three years. “This is a fully portable product, which means the homeowner doesn&#39t have to reorganise their MPPI because they are moving house or even switching lender,” says Dudgeon. “Homeowners find this useful because if they have suffered an illness after taking out the product, it would effectively be treated as a pre-existing condition when they approach a new insurer.”

A spokesman for Marketplace at Bradford & Bingley says bad press over single premium policies means it doesn&#39t offer them and has no plans to move into this market. Nor does Halifax, which argues that monthly payments are simply more convenient for customers.

Paul Banfield, senior financial adviser at Best Advice Financial Planning, refuses to sell single premium policies. “Single premium cover is really inflexible. If you pay upfront and want to alter the policy in the future, some policies won&#39t allow you to do this, while if you redeem your mortgage you could be left with cover that you no longer need. This is a good way for people to waste their money.”

Banfield says single premium contracts are not always expensive in themselves, it is the way the premium is repaid that punishes the client. Crunching numbers from Lloyds Mortgage Care, he shows that cover worth £700 a month would cost £1,869 on the company&#39s single premium contract. Monthly premiums would cost £34.65 a month, giving a marginally higher total payment of £2,079. “The single premium contract is £210 cheaper than paying monthly, which you would expect, as you are paying in advance.”

But repaying the premium over the full mortgage term makes it much more costly. Repaying £1,869 over 25 years at the Halifax standard variable rate of 5.75% would cost £3,600 in total repayments, an extra £1,731. “Repaying a loan over 25 years is ridiculously expensive, but many people buying this product won&#39t realise that,” Banfield says.

“Lloyds Mortgage Care is a fair company and its product is fairly priced, but others in the markets are less scrupulous. The only reason a broker would sell single premium cover is because the commission is so high. People should not be recommending this type of cover, it&#39s giving the industry a bad name.”

Ray Boulger, senior technical manager at brokers Charcol, is someone else who won&#39t touch single premium MPPI. “It is often the less ethical brokers in the sub-prime market who tend to push this product. Right to Buy council tenants, who are more likely to be unskilled workers and face problems finding new employment if they lose their job, need mortgage protection more than most, but a single premium isn&#39t the way to deliver it.”

He has only heard one reasonable-sounding argument in favour of single premium MPPI, but even that didn&#39t withstand close scrutiny. “Some providers argue that paying the premium upfront and adding it onto the loan helps the policyholder&#39s cash flow, but it is a false economy. The payment is cheaper every month, but only because you are swapping short-term debt for a long-term repayment. This doesn&#39t make it better value.”

When paying premiums upfront, customers expect to make a saving as they do on motor or household insurance. This can happen, as with Lloyds Mortgage Care, but it isn&#39t always the case. “In many cases, you actually pay more. Monthly MPPI premiums typically range from between £4.50 to £7 per £100, with around £5 being a good competitive benchmark. Yet I have seen single premiums costing around £8.50 a month. Commission is the main driver behind sales, I have seen rates of over 40%, and on a four-figure premium that can, of course, add up to quite a substantial sum.”

Boulger says an MPPI policy is only as good as the broker selling it. Monthly premium contracts can be can be mis-sold just as easily as single premium. “Many brokers don&#39t question their client closely to find out whether they really need cover. They have to account for a range of factors such as any workplace sickness benefits or group income protection they may have. These may be much more attractive than an accident and sickness contract that only pays for 12 months.”

The self-employed also have different protection needs, Boulger says. “It is highly unlikely they can claim redundancy cover, which means they may be better off with standalone accident and sickness cover, or income protection. The decision will also partially rest on what they do for a living. Those in low-risk occupations may find income protection costs only a fraction more than MPPI, but protects them until retirement age. Those in riskier occupations may still prefer accident and sickness cover, which charges a flat premium with no individual underwriting,” he says.

Payment protection is also heavily sold on personal loans. “Intelligent Finance is rare in calculating the premium on a monthly basis. Most lenders charge the client the lump sum upfront, then spread repayment across the term, a fact that borrowers rarely understand. If they pay off the loan early, as many do, they get little or no rebate on the cost of cover. This is less of a problem with single premium MPPI, as people won&#39t pay their mortgage off in five years. They may remortgage, however, which means cover should be portable, and there should be a pro rata refund if the policy is cancelled.”

Simon Burgess of Goodfellows says many MPPI providers, notably the major lenders, have their own tricks for offering customers inferior products, without having to resort to charging single premiums.

Recently-agreed MPPI baseline standards also allow providers to exploit customers, he claims. Policies are often sold with a 60-day excess, and holders cannot claim while they are receiving payment in lieu of notice. Somebody made redundant on July 1 probably won&#39t start earning benefits until October 1, and since they are paid monthly in arrears, the mortgage lender won&#39t receive the first payment until November. “Unless the client has savings to meet the shortfall, they will be in mortgage arrears, and possibly even blacklisted,” he claims.

“I find the cynical exploitation of the poor and poorly-advised to be outrageous. In this example, our back-to-day-one cover would mean a payout from August 1, a full two months earlier, yet our premiums are 33% cheaper. We charge £3.95 for 12 months&#39 cover, while the average for the major lenders is £5.78.”

In September, a survey by MPPI providers DMS, showed that protection sold by mortgage brokers was £2,300 cheaper during the lifetime of a loan – costing £6,021 in total against £8,392. This gave a saving of £2,371. Intermediaries clearly have an important part to play in securing the most attractive rates and appropriate cover for their clients. Spiralling house prices, growing economic gloom and fears of job losses make this an insecure time for homeowners, particularly those who have recently stretched themselves to place their first foot boldly on the property ladder.

Almost four out of five still have no form of MPPI and nearly two out of three have neither MPPI nor critical illness cover, according to Legal & General. If the mortgage industry is to make further inroads into these figures and hit its target of 55% of homeowners having cover, it needs to ensure the policies it sells and the way it sells them, are clean and without controversy.

Millions wasted on overpriced cover

Millions of homeowners are throwing money away by taking up their lender&#39s MPPI rather than shopping around for a better deal.

Goodfellows says consumers are wasting nearly £250m a year on overpriced MPPI. It says a staggering 90% of homeowners who buy the policy purchase the cover offered by their own lender. But by failing to check out other deals they are missing out on the most competitive rates.

MPPI covers monthly mortgage repayments if you are unable to work because of accident, sickness or unemployment.

The Goodfellows survey found that consumers who applied directly to their lender for cover ended up paying, on average, £5.80 per £100 of monthly cover. But it is possible to get it for far less.

“Most customers buy Mortgage Payment Protection Insurance from their bank or building society who provide their mortgage and are unaware that they have a choice and can buy elsewhere,” says Goodfellows MD Simon Burgess.

“With hefty MPPI commission rates – frequently topping 50% – there&#39s no doubt that it pays to shop around. This is yet another example of where the big financial players rely on inertia and lack of customer awareness to secure sales.”

BMS urges clients to go for MPPI

Birmingham Midshires Solutions is urging consumers to take mortgage payment protection insurance to safeguard against accident, sickness or unemployment.

Figures from the CML show that only 31% of Britons have insured their mortgage payments. The BMS campaign involves flagging up the benefits of MPPI. These include protected mortgage payments if borrowers lose their job, or are too ill to work. It gives mortgage cover for up to 12 months.

Policies generally cost between £4 to £6 for every £100 of the monthly mortgage. Some lenders will offer free protection for the first six months of the cover.

The maximum borrowers can insure is quite often 65% of monthly income, or £1,500, whichever is the lower figure.

To get MPPI, borrowers usually have to provide proof of regular employment for six months. There is normally an excess period of 30 to 60 days when no payment is made. However, some insurers will backdate the claim once they have started regular payments.

Steve Sandiford, head of products at BMS, says: “We want to make sure homeowners know how MPPI could shield them from the unexpected.”

What do you think about single premium MPPI?

Simon Burgess, Goodfellows. “Single premium MPPI is only sold by unscrupulous brokers seeking fat commission. Products can pay commission worth between 70% and 80%, so you can draw your own conclusions. There is no justification for selling this product, it should be stamped out immediately.”

John Plackett, Bennett Gould & Partners. “The single premium contract has a role and we will continue to offer it as long as there is demand from brokers.”

Ray Boulger, Charcol. “Single premium policies aren&#39t cost-effective for the client. Repayments are spread out over 25 years, and you don&#39t even get a discount for paying upfront. With commission rates of 40% not uncommon, it is easy to see why they are still sold.”

Kevin Milliken, Premier Writers. “The monthly contract is far superior. It can be cancelled at any time, giving greater flexibility as well as spreading the cost of cover.”

Geoff Hall, Barclay Alexander. “There is a place for five-year single premium MPPI, provided the contract includes a refund option and the ability to strip out either unemployment or sickness and accident cover.”

Maurice Keenan, Centrepoint Insurance Services. “Single premium MPPI is more expensive, but benefits on our policy are payable for up to five years, which means we are potentially taking on a major financial obligation.”

Michael Buse, Sterling Hamilton Wright. “There are a host of reasons why we don&#39t offer single premium MPPI. We have the capacity to do so, we can find the necessary underwriting, but it is much safer for us and our clients to stick to monthly premiums.”

Paul Banfield, Best Advice Financial Planning. “Some companies charge a horrendous amount of money for a basic level of cover. I am in business to make a profit, but I won&#39t do it by tying my clients to this type of contract.”

THE MPPI rip-off: Consumers should shop around for the best deal Moneynet has warned that many of the 2.5 million homeowners who have mortgage payment protection insurance could be paying up to 33% more than necessary.

Moneynet claims mortgage lenders are taking advantage of borrowers on the basis that most are ignorant of the fact that they can shop around for their MPPI.

Over 2,534,000 of UK homeowners have MPPI and the take-up rate for new policies is increasing. In 1998, 23% of new mortgages were taken out with this insurance; in the last six months of 2001, the figure had increased to 36%. But premiums vary between the providers.

Moneynet managing director Richard Brown says: “Just because a mortgage payment protection plan is one of the most expensive, it doesn&#39t mean you are getting a better level of cover. The only difference in 99% of the cases is how much commission goes into the provider&#39s pocket.

“People should be aware that they can shop around. If every policyholder switched to a lower cost policy, £6bn could be saved over the term of an average mortgage. It&#39s time this protection rip-off was highlighted to consumers.”