Dear Delia: In common with other mortgage brokers I have been following the debate surrounding payment protection products with interest. Is there a mortgage payment protection product that I can recommend and be secure in the knowledge that I am offering best advice?
Delia says: The investigation by the Office of Fair Trading into payment protection has made some advisers wary about directing their clients towards these products. Here, Mike Gamble of Berkeley Alexander Insurance Services and Simon Burgess of Britishinsurance.com offer their advice.
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Mike Gamble is UK sales and marketing manager of Berkeley Alexander Insurance Services
Following statutory regulation of the mortgage and general insurance markets, it is imperative that brokers operating in either or both sectors have a policy of always treating their clients fairly and only recommending products that fit with customers’ profiles and needs.
Brokers have to offer best advice and this must include an obligation to sell them products that will ensure they keep the roof over their heads if they find themselves unable to meet mortgage repayments through accident, sickness or unemployment.
At a time of increasing unemployment and rising repossessions it is incumbent on brokers to make clear to borrowers that their homes are at risk if they do not have adequate insurance cover and cannot make repayments. Should they fail to, it is possible that clients will turn up on brokers’ doorsteps in the future claiming that since a broker had not pointed out the benefits of mortgage payment protection insurance they are guilty of negligence.
Should a client decline to take out MPPI cover after the benefits of doing so have been explained it might be a good idea to get them to sign a statement to that effect. There have been occasions in the past when unemployment cover has been offered to the self-employed and accident and sickness insurance to those already covered through an employer’s long-term sick pay scheme. Make sure you know your client profile and offer only appropriate products.
Home buyers under the age of 40 will almost certainly benefit from age-banded MPPI. It is advisable to go the extra mile and consider the benefits and features some policies offer such as including a comprehensive back to work pack- age or a range of options such as back to day one and excess facilities.
Most clients are better suited to monthly renewable MPPI and while single premium policies have their place, anyone selling a single premium policy must be able to show that this is the better choice for a client than a monthly contract which usually offers much more flexible cover.
Also, the Financial Services Authority and the Office of Fair Trading have been critical of the payment protection insurance market but the FSA has accepted that MPPI is usually sold in a better way than PPI.
However, it is important that commission rates are fair and brokers should use comparative quotation systems that compare products for policy cover and features as well as price.
Simon Burgess is managing director of British Insurance
The first thing a broker should do is warn their client that taking out an MPPI policy with their lender will cost them more.
Lenders offer single premium policies whereby the cost of the policy is wrapped up with the loan, meaning borrowers end up paying a lot more over the term of their loan. Many loans do not run to their full term and no refund is given if a policy is stopped early.
Too often, providers are unwilling to make a long-term commitment to the policies they offer and we’ve all heard the horror stories of cover being withdrawn, leaving people high and dry. Clients should be shopping round for their payment protection cover in the same way they do for other insurances, and it is a broker’s duty to point them in the right direction.
One of the big potential downsides of PPI and MPPI is that insurers often have the right to discontinue cover or change terms or premiums, often at 30 days’ notice. In no way can this be seen as treating customers fairly.
Brokers should look for a policy that comes with a guarantee of at least a couple of years but is still competitively priced. High commission rates have been the scourge of this sector for years. Commission rates are being used by firms to inflate their profits and carry other poorly performing products, and do not represent good value for consumers. This again is unacceptable in a market that purports to treat its customers fairly.
It is generally cheaper to get standalone cover offered by a specialist broker and this should be your first port of call in attempting to find a suitable product for your client. But make sure you are not doubling up on insurance that the client might already have in place. For example, short periods of illness may be covered by an employer’s sick leave policy and clients may have other safeguards in place such as critical illness cover or income protection.
Clients are often led to believe that MPPI is a compulsory insurance by lenders and are not made aware of alternative providers, or that they can choose not to buy this cover at all.
There is also a wide variation in pricing in this sector, with some lenders inflating their gross profit margins on an insurance that has a typically low claims ratio compared with other cover products.
Brokers must be aware of the best products available on the market, both in terms of price and cover. Comparison tables are a good indicator.