Lenders and intermediaries, with encouragement from the government, are keen to ensure that borrowers fully understand that sickness can have adverse financial consequences in respect of mortgage payments. Indeed, section 3.2 of the Mortgage Code requires subscribers to ensure that this point, amongst others, is made to applicants when providing advice or information on mortgage products. Not surprisingly, the subject is included in the syllabuses of the mortgage advice qualifications and related questions in the examinations should be of no surprise to candidates. However, what should be relatively easy questions are sometimes answered incorrectly, often because of a failure to read a question carefully.
There are three forms of cover to provide financial support that are contained within the mortgage advice examination syllabuses – accident, sickness and unemployment (ASU) which is sometimes referred to as mortgage payment protection insurance (MPPI), permanent health insurance (PHI) and critical illness cover (CIC).
ASU, like PHI and CIC, is a form of general insurance and, as such, is currently unregulated. However, with effect from N3, the selling of both mortgages and general insurance products will become regulated activities. ASU policies are relatively inexpensive and outline details and benefits of these products are contained in information leaflet: 'Take cover for a rainy day. How insurance can protect you from mortgage arrears', available from the Association of British Insurers and the Council of Mortgage Lenders.
There is a wide range of contracts under the general heading of ASU. The main points are that the cover provides a regular income for a limited period, generally one or two years, if the insured is unable to work due to accident, sickness or unemployment. The term 'unemployment' does not cover unemployment after sacking or redundancy which the proposer had reason to believe was imminent when the policy was effected. Furthermore, the proposer must have been actively and continuously employed for a specified period prior to the proposal. Only certain policies will cover unemployment if the policyholder is self-employed.
PHI provides an income if the insured is unable to work due to sickness or accident. It provides cover until the policyholder returns to work, reaches their retirement date or dies, whichever comes first. Therefore, when answering a question relating to a client who requires income replacement to cover mortgage payments and, perhaps, other expenses in the event of sickness or accident, candidates should note whether the question relates to the requirement for long-term-cover or cover for a limited period only. In the case of the former the answer would indicate PHI, whilst the latter would indicate ASU.
PHI cover can be issued on a 'normal occupation' basis or an 'any occupation' basis. The former would represent more expensive premiums, as payments will be made until the insured can return to their normal job, whilst the latter only provides cover until the insured can return to any suitable occupation.
Benefit levels are set so that the insured cannot get more money from not working than they could from working. Typical maximum levels of income benefit are 60% to 70% of pre-disability earnings and benefits are paid on a pro-rata basis if illness means that the insured can only work part-time.
CIC provides a tax-free lump sum on diagnosis of an illness listed in the policy. There is generally a requirement that the insured survives for a specified period, usually 28 days, from the date of diagnosis. The illness need not be terminal, but many terminal illnesses are covered in the policy. Naturally, policies do not cover pre-existing conditions.
Clearly, if an examination question indicates that an individual is seeking cover that will provide a lump-sum payment in the event of illness, CIC, rather than PHI or ASU, is the cover required. This is not difficult to work out, but experience shows that failure to read a question carefully does lead to some candidates losing marks unnecessarily on questions set on this area of the syllabus.