The Department of Work & Pensions has confirmed it will exclude insurance pay outs that are designed to cover mortgage payments, when calculating means-tested benefits.
This clarification was sought after significant changes to the benefits system, which has seen support withdrawn for mortgage interest payments at the start of this tax year.
From 6 April homeowners who are unable to work due to sickness, or unemployment, will not qualify for help with mortgage payments.
Instead they will have to apply for a loan from the Department of Work & Pension, known as a Support for Mortgage Interest Loan.
However, there was concern that homeowners who have taken out insurance to protect them in such circumstances, could find their access to other benefits restricted as a result.
Clarification on this matter had been sought by the Income Protection Task Force and the Building Resilient Households Groups.
These groups confirmed that ‘income’ from these insurance payouts will not be taken into account when assessing eligibility for universal credit or other legacy benefits.
However the IPTG says that the DWP did make two important clarifications.
If insurance payouts are restricted to the payment of a mortgage – for example if it is paid direct to the lender – then these payouts will be disregarded in full.
However, if the claimant has choice over how to spend the payment then only “any portion which the DWP judge to be intended and used for mortgage cover” will be disregarded.
If a claimant applies for a SMI loan, their insurance payout will be taken into account when their offer a loan is considered.
As a result the IPTG says it was seeking further information on how the DWP would assess a lump sum payment that is typically paid out on a critical illness plan.
The Building Resilient Households Group joint chair, Richard Walsh says : “This clarification means that people who choose to protect their mortgage payments with an appropriate insurance policy can do so without fear that any payout will lead to their benefits being cut.
“Advisers should alert clients to the risk that loss of income through sickness or other causes may lead mortgage holders into spiralling debt – and advise on appropriate protection.”
Lifesearch chief executive Tom Baigrie says: “This is an important first step in making the private provisions of disability benefits dovetail seriously with those offered by the state.”
He says this should encourage more competition and greater innovation in the mortgage protection market.