Homebuyers misled into buying mortgage protection
Homebuyers are being wrongly told they can only get a mortgage if they buy income protection cover or life insurance, an investigation has found.
June 27, 2019
Homebuyers are being misled into buying income protection and life insurance, an investigation has found. Research for Money Mail has revealed more than three in ten borrowers have been told life insurance is a legal requirement. And a further third were advised they couldn’t get a loan without it. While more than half of those who were sold income protection insurance along with their mortgage were told it was mandatory.
Is insurance compulsory when getting a mortgage?
No, none of these products are compulsory if you want to take out a mortgage. So if you feel you are being coerced into taking out a policy then stand your ground. Buildings insurance is the only cover typically required as a condition of obtaining a mortgage.
Why the hard sell?
The investigation highlighted the fact brokers can earn serious money selling these policies. Anthony Emmerson, director of Mayfair-based Trinity Financial, told the paper brokers dealing in lower-value loans could earn far more from selling life insurance policies than from the mortgage itself.
He says: “If the average house price is £200,000, the broker is going to earn three or four times as much commission on the insurance as they are on the mortgage. That might be a driver for them to say it was compulsory, but it would be mis-selling.”
What are the different types of cover available?
It’s important to understand the different types of policies.
Income protection is designed to replace a proportion of your income should you be unable to work due to an accident or illness. You can also get policies that will cover you if you are made redundant.
Mortgage payment protection insurance (MPPI) will cover your loan repayments for a set period of up to two years if you lose your job or have an accident or illness which leaves you unable to work.
Critical illness cover pays out a lump sum if you develop one of a range of listed serious medical conditions.
Life insurance is an agreement between an insurance provider and an individual in which the provider promises to pay a chosen sum of money in the event of the individual’s death within a fixed period of time in return for premiums paid.
What to consider before taking out a policy
And insurance has a critical role to play. When you take out a mortgage it is the natural time to consider carefully how you would cope financially if you or your partner had an extended period of sickness, were made redundant or died prematurely.
So by all means get a quote from your broker or lender, alongside quotes from other mortgage protection suppliers from searching online.
But before you sign up, it’s essential to find out if you already have cover in place. For example, do you already have life insurance cover through work? Check your contract or ask your employer. Also, are you entitled to sick pay? If so, how much would you get and for low long? And if you are concerned about redundancy, work out how much of a payout would be due to you if you lost your job. Taking these factors into account will help you to assess whether or not you feel you need any of these policies.
If I want to buy it, do I need to get it from my bank?
Absolutely not, so it’s essential you shop around. However research by comparison website ActiveQuote has shown many people fail to do this. It surveyed 2,000 UK adults and more than one third said they bought life insurance from their mortgage provider or financial adviser. While a further 8% were unaware that they could even shop around for a cheaper deal.
However if you don’t shop around you may end up paying more for your policies.
What else to I need to know about income protection insurance?
- Your policy will have an excess period and a minimum claim period (sometimes known as a wait period or a deferred period). Add these together to determine when you will receive your first payment. The total waiting period is normally up to a year, but it can be more.
- Most insurers will exclude cover for pre-existing medical conditions. And you won’t get a payout for unemployment if you knew that your job was at risk of redundancy when you took out the policy.
- And you can buy income protection if you are self-employed. The insurer will want to look at your earnings history to determine what kind of cover you can get.
What about life insurance?
There are some key factors to consider when you buy life insurance too. Look for the best deal, not the cheapest one. Paying slightly higher premiums may mean you get additional benefits. And if you buy a life insurance policy, it is a good idea to make a will as well that states where or who you want the money to go to.
Also, as life insurance becomes more expensive with age, it makes financial sense to take out a guaranteed policy in your twenties or early thirties and keep it until the term has ended.