Opinion & Analysis
Richard Walsh: Mortgage Protection – Now is the Time for Action
19 Jul 2018
Over the last five years, a third of the adult population have suffered a severe income shock arising for example from sickness, accident or job loss. Most of these people lack the savings, insurance or other resources to enable them to weather the financial shock. While State benefits can help, they rarely cover all outgoings. The results can include problem debt and long-term damage to the prospects of individuals and families. This can be particularly pronounced in some cases, for example in the case of sickness/accident where a lack of back-to-work support may cause permanent damage to future employment prospects.
Unless people are lucky enough to be in a group income protection scheme the only solution for families who are concerned about the major causes of sickness absence such as mental illness or musculo-skeletal conditions are IP or State Benefits. Life and CI policies are also important of course but they rarely cover such conditions. State benefits are changing with the introduction of Universal Credit (UC) which is being rolled out for new claimants this year. In essence UC joins together many legacy means tested benefits with a single set of rules. The key aims are to make work pay and to simplify the system. Simplification can have its pros and cons in terms of interaction with insurance. Fairly soon The Building Resilient Households Group hopes to be able to announce the implications of this for CI and term life policies.
In the meantime, and more immediately important, from 6 April 2018 people who suffer a loss of income from sickness or other causes can no longer get state benefits to cover their mortgage payments. Instead some people may be offered and qualify for a loan, called a Support for Mortgage Interest Loan (SMIL) in which case DWP will, where possible, put a charge on their property. This means that all mortgage holders now need to consider protection if they want to avoid eating into the equity in their home in the event of a prolonged sickness absence
In the light of these changes the Building Resilient Households Group, has sought clarification from DWP about how pay-outs from protection policies will be treated under the new system. The key point from the clarification we have now received is any income received from an insurance policy which is specifically intended and used to cover mortgage payments will be totally disregarded when entitlement to means-tested benefits is assessed. This applies to both legacy benefits and Universal Credit
Two provisos should be noted:
- If insurance pay-outs are restricted to the payment of a mortgage (e.g. by being paid direct to the lender) they will be fully disregarded. But if the claimant has choice over how to spend the payments then only any portion which DWP judge to be intended and used for mortgage cover will be disregarded.
- If a claimant applies for a Support for Mortgage Interest Loan their insurance payout will be taken into account when their offer of a loan is considered. However, this scenario is unlikely to be a common one as people would have no need for a loan while receiving insurance payouts which fully cover their mortgage.
For advisors, the introduction of SMIL is extremely important. You need to tell your customers who have mortgages about the change. Not taking action can lead to sickness absence causing spiralling debt and loss of equity. In my view this is important for both mortgage protection specialists and wealth management IFAs. Even quite high levels of savings can soon run out when sickness moves from short to longer term. Remember the changes mean you won’t get help from the state for your mortgage repayments and people who choose to protect their mortgage payments with an appropriate insurance policy can do so without fear that their pay-outs will lead to their benefits being cut.