Mortgage Protection: Three ways financial advisers add value

Director of Drewberry, Tom Conner, reveals the reasons why financial advisers are so crucial to ensuring mortgage customers take out the right protection plans.

Mortgage protection will always be one of the main drivers of protection sales. Drewberry research, revealed that getting a mortgage was the most common reason for people to start looking into protection, followed by having a child.

Despite this, recent research from the Association of Mortgage Intermediaries (AMI) found that only 36% of mortgage customers remember protection being mentioned during their mortgage application, despite 97% of advisers claiming to have brought it up during the process¹.

Hence, there will always be ample opportunities for financial advisers to help clients safeguard what’s likely to be the biggest debt they will ever have. However, it can be a complicated issue for most consumers, and that’s where an adviser can step in to put in place the right protection package. Here are three ways they do.

1. They help clients get the right policy combinations

There are three main policies that can provide great protection for clients that are worried about mortgage repayment:

• Decreasing term insurance – For clients with dependents (such as a partner and/or children) and a repayment mortgage, the starting place is often decreasing term insurance. The purpose of this life insurance policy is to repay the outstanding mortgage balance should the policyholder pass away and because it only pays out on death the premiums are generally very affordable for most.
• Critical or Serious Illness Cover – There is also the option to add critical or Serious Illness Cover to the decreasing term policy so it would payout a lump sum to repay all or a proportion of the mortgage loan should the policyholder suffer a serious illness or injury. Adding this cover can often treble the monthly premium and isn’t always affordable for all. If affordability is an issue, it is possible to add a smaller amount of cover to the policy to gain some protection while keeping the premiums within budget (for example, the policy may contain £200,000 of life insurance and £100,000 of critical or Serious Illness Cover).
• Income protection – Another option is Income Protection. This policy could cover the client’s monthly mortgage repayments should the client suffer any illness or injury that prevents them from working, rather than having to meet a pre-defined medical condition like with critical or Serious Illness Cover. As the policy could payout for any medical condition that prevents the client from working, it is often considered to be very comprehensive. The plan can be set-up so it continues to payout each month either until the client is well enough to return to work or reaches the end of the policy term, which can be aligned to the end of the mortgage term.

The client clearly has a number of options when protecting their mortgage and it’s the role of the adviser to discuss each option and put together a package of cover that fits within the client’s budget. Here are a couple of additional tips:

• The traditional ‘go to’ for mortgage protection has been life insurance combined with critical or Serious Illness Cover, however the combined premium for life insurance and income protection can often work out lower, so it’s worth considering.
• Traditional critical illness plans have only paid out for very serious medical conditions but now many plans include ‘partial payments’ for less serious conditions. Despite this, there are going to be conditions (such as psychological and musculoskeletal) that can keep clients off work but wouldn’t qualify for even a partial payout. If you’re arranging critical or Serious Illness Cover for a client and they have additional budget, consider adding an income protection plan with a one or two year maximum payout period to plug any gaps in coverage for conditions that wouldn’t be covered under critical or Serious Illness Cover plans.
• It is very common these days for unmarried couples to purchase a property together, but care needs to be taken when arranging joint life cover for unmarried couples. Although 100% of the sum assured would pass to the remaining partner, 50% of the payout could be attributed to the personal estate of the deceased and could cause rise to an inheritance tax liability. Arranging two single plans in trust for other partner can help to avoid this potential issue
  
  

2. They also consider the clients wider personal protection needs

So, the mortgage is repaid, but can the client still afford to live in their house?

When considering a client’s protection needs, advisers won’t just focus on protecting the mortgage but also the client’s wider requirements. Each client will be different so it comes down to having a decent fact-find to identify what might be appropriate for a specific client. Here are some considerations:

• After the death or serious illness of a partner, the mortgage might be paid off, but would the remaining partner be able to pay all the other household bills on their own? If not, then additional cover could be needed.
• If one partner died or was seriously ill, would the other partner still be able to work? If they have young children, this could be difficult.
• If they have children, do they aspire to help them with university funding or getting on the property ladder? Would this still be possible with only one partner earning an income?

In most cases you’ll find the need for additional cover, which could come in the form of a separate ‘family protection’ life insurance plan (potentially with critical or Serious Illness Cover). You could also consider family income benefit which is a very cost-effective form of life cover. With an income protection plan you could increase the level of cover to include other household bills. It all starts with asking the right questions.

3. They talk about the additional value of rewards and benefits

Protection insurance is far more than just insurance these days. Many plans come with an array of additional benefits that clients can use from right away, thus providing immediate value.

For example, busy families can make use of remote GP services. Another common benefit is discounted gym membership. With Vitality it’s possible to get up a whopping 50% off the likes of Virgin Active and Nuffield Health as well as a range of other rewards and benefits through the Vitality Programme. There are often counselling and/or remote physiotherapy benefits that can be used by clients, even if they have pre-existing medical conditions.

Without an adviser these benefits often get overlooked and some clients value the additional benefits just as highly as the insurance cover itself.

Find out more about how Vitality can meet the mortgage protection needs of your client with a range of plans.

Sources:
1. AMI, The New Protection Challenge Report, 2020