Mortgage cover bids to plug all the leaks

Caroline Laws reports on moves to clean up payment insurance

If you have taken out a mortgage recently, you were probably offered an insurance policy that covers the mortgage payments if you fall ill or lose your job. And you probably turned it down. Seven out of 10 new borrowers don't bother with this cover. Overall, only one in five of us have mortgage payment protection insurance (MPPI).

These deals are usually offered to new borrowers as "mortgage repayment insurance" or "unemployment and sickness insurance", but they amount to the same thing: a way to make sure the mortgage gets paid if you hit hard times.

So why aren't more of us taking out MPPI? These policies are an extra expense at a time when money is tight. And they have (rightly) had a lousy press. On some, the list of exclusions was so long that it often wasn't worth buying the insurance in the first place. For example, refusing cover for stress-related problems and backache wiped out 20 per cent of claims immediately, according to Philip Watson, director at independent mortgage broker John Charcol. Many policies also demanded you wait 120 days before cover kicked in. (By this time there was a good chance you already had another job.) People were also put off by newspaper stories of DSS offices cutting benefits to people who had income from insurance pay-outs.

All this was off-putting, but from next week MPPI may be worth another look. The Government has got together with the Council of Mortgage Lenders (CML) and the Association of British Insurers (ABI) to devise minimum standards that will apply to all mortgage payment protection policies. They will be incorporated into new policies from 1 July, while existing policies must be updated to include the standards by 1 July 2001.

Several firms have already announced special offers to encourage take up. CGU Direct, for example, is selling a policy over the phone. The first three months' cover is free. Costing an average of pounds 4 a week, Protect Direct will pay your mortgage for 12 or 18 months and covers the self- employed and contract workers.

If you don't have substantial savings to fall back on, there is a solid reason for taking out mortgage insurance. Anyone who has taken out a home loan since October 1995 won't get state benefit - known as Income Support for Mortgage Interest - for the first nine months of unemployment.

Even if you took out an earlier mortgage, you still won't get any help for the first four months - and then reduced help for the next five months.

If your spouse or partner works more than 16 hours a week, you may not qualify for benefit at all. It is also reduced if you have savings of more than pounds 3,000, and that dwindles to nothing for savings over pounds 8,000.

All new policies will include a fixed waiting period before the insurance pays out. This is set at a maximum of 60 days for all policies if you arrange cover at the same time as the mortgage, and 120 days if you do it later. Cover must pay out for a minimum of 12 months. Certain medical conditions - such as Aids, pregnancy complications, backache, stress and mental disorders - should be assessed individually rather than being automatically excluded.

Contract workers will also be covered by MPPI if they can prove they are on a yearly contract that has been renewed at least once, or that they have held a contract with the same employer for at least two years. The self-employed are also eligible if they have told the Inland Revenue that they have stopped trading through no fault of their own and registered for a Job Seeker's allowance.

The most comprehensive policies offer accident, sickness and unemployment (ASU) cover costing around pounds 5.50 per pounds 100 of your mortgage payments. So if your payments are pounds 600 a month, you would be looking at around pounds 33 a month to cover yourself.

But you can insure yourself for just one of these risks. Mr Watson, at John Charcol, says: "Around 80 per cent of people who come to us are only taking out unemployment benefit. We are finding a substantial growth in demand because of fear of redundancy. It has doubled since Christmas and we see the trend continuing. My advice is to assess your needs and shop around; you will generally get a better price than your lender will offer. You should be looking at paying around pounds 2.90 to pounds 3.00 per pounds 100 for unemployment- only cover."

Unemployment-only cover can be cost-effective, particularly if you are already insured at work for prolonged sickness or time off due to an accident. If your employer doesn't offer sick-pay cover, there are other alternatives to MPPI. You could look at income replacement insurance, also known as permanent health insurance, which will pay you a proportion (usually 65 to 75 per cent) of your salary or earnings until you return to work. Many policies now also include unemployment cover.

Only buy a policy that offers decent cover and insures you for your "own occupation"; some will only pay out if you are incapable of doing any job. You should expect to pay around pounds 30 to pounds 40 a month at age 35 for a pounds 2,000-a-month income for men and pounds 1,000 a month for women. Premiums will rise to around pounds 50 a month by age 50.

Alternatively, you could look at critical illness insurance, which pays out a lump sum if you are diagnosed as having a specific illness, such as heart disease or cancer. Stand-alone cover that would pay out a pounds 100,000 lump sum will cost between pounds 40 and pounds 80 a month.

n Contacts: CGU Direct, 0800 121008; John Charcol, 0800 939393.

The Council of Mortgage Lenders produces a leaflet, `Take Cover for a Rainy Day', which advises on MPPI; call 0171-440 2255. The DSS also has a leaflet, `Protecting your Mortgage', at local offices.