Networks have told me that only one-in-four mortgages arranged are safeguarded by mortgage protection plans. This is poor and worse, from what I hear, it seems that the majority of mortgage advisers do not review their clients’ mortgage protection when they switch rates or even when the clients move to a new property.
Most commentators will argue that this failure goes against the spirit of Consumer Duty. Regardless, it certainly goes against common sense – let me explain.
Mortgage protection plans with critical illness cover have been improving every year since 2007, the year that the ABI Critical Illness Working Party dumbed down the claims wordings in an abortive effort to futureproof the product. If you care to delve through the Financial Ombudsman decision database, you’ll note that many of the complaints received result from consumers having suffered from a condition that is not included in their existing plan, even though their insurer now includes it for new customers. This creates anger as the consumer believes that they should similarly benefit from the improved condition list.
A recent reader’s letter that was printed in a newspaper’s financial agony column related how the reader had suffered cardiac arrest and subsequently had their claim declined because that particular condition was not included within their plan. The claimant believed it should have been paid under the heart attack heading which, of course, is a completely different condition.
Similarly, around nine years back, the case of Hein Pretorius made national news after he lost a leg in a road accident only to find that his year, 2007, policies insisted on the loss of two limbs.
Not only do today’s plans include more conditions, but the claim wording of many of them – such as deafness, blindness, third degree burns and multiple sclerosis – have improved dramatically. Additionally, children’s critical illness cover has improved substantially in recent years with the quality plans commencing at birth and lasting until the 23rd birthday. Cover has also extended to include congenital conditions and, in many cases, children’s critical illness is now optional with a variable sum insured. What’s more, all good plans now include pregnancy complications and a range of additional health services such as a second medical opinion, 24/7 GP access, and annual health MOTs.
Consider also the synergy between the loan size and the policy sum assured. Whilst critical illness plans tend to become dearer due to the improved benefits, the differential between the mortgage debt and the policy sum insured has also been widening. The table below highlights where a mere difference of 4% between the mortgage and policy rate provides an increasing over-insurance. After five years the mortgage balance is 6% less than the insurance sum insured and after 10 years has become 13% less, rising to 22% after 15 years.
The table below compares an averaged mortgage rate of 4% and a mortgage protection plan set up on a fixed 8% basis.
| At start | After 5 years | After 10 years | After 15 years | |
| Mortgage balance average 4% | £175,000 | £152,433 | £124,879 | £91,235 |
| Mortgage protection plan at 8% | £175,000 | £161,479 | £141,336 | £111,325 |
£175,000 repayment mortgage over 25 years
Even though the clients will be older, the sum insured differences could enable one of today’s more comprehensive plans to actually prove cheaper and therefore more palatable than one that is, maybe, 10% dearer.
In any event, the requirements of Consumer Duty now place an obligation on the adviser to undertake regular reviews to ensure that the protection plan continues to meet the clients’ needs and also, importantly, take into account the potential outcome.
Finally, for those mortgage advisers who never, or infrequently, arrange mortgage protection, think on this. You have assisted your client into long-term debt, surely you have a responsibility to ensure that the debt can be repaid when ill-health or premature death strikes?
