Nick Telfer: Rethinking mortgage protection
With Consumer Duty putting the spotlight on the need for protection, it’s got many of us thinking about opportunities to grow the market. But in light of changing regulations, alongside evolving consumer needs, 'is it time to rethink mortgage protection?' asks Vitality's Head of Protection Development, Nick Telfer.
The newly introduced requirement to deliver ‘good’, rather than ‘fair’ client outcomes, has set a much higher bar for our industry, renewing focus on the quality of cover, rather than just how much its costs.
Consumer Duty has also rightly prompted discussions about how we avoid foreseeable harm and whilst the need for mortgage cover is obvious, surely consideration must also be given to a client’s wider protection needs.
"Traditional mortgage protection risks leaving clients under-insured. We aren’t helping them to avoid foreseeable harm, nor are we helping them to pursue their financial objectives."
- Vitality's Head of Protection Development, Nick Telfer
What is mortgage protection?
Traditional mortgage protection is usually seen as decreasing term cover, to repay the client’s mortgage if they died during the term. Where budget allows, this might include critical or Serious Illness Cover.
This means they’re often insured for the least likely risk to arise1, such as premature death during the mortgage term.
What’s more, there’s no guarantee the client or their family would even use the pay-out to repay the mortgage if they did claim.
Recent research published in CIExpert’s Critical Thinking report found that just 19% of critical illness claimants used the money to pay off all or part of their mortgage2.
The two most common ways claimants spent the money was on private medical treatment or covering lost earnings whilst they couldn’t work due to the illness2.
Considering broader protection needs
All of this means that traditional mortgage protection risks leaving clients under-insured.
We aren’t helping them to avoid foreseeable harm, nor are we helping them to pursue their financial objectives – I.e. being able to afford to carry on living in their home.
What many clients will require instead is lifestyle protection, incorporating mortgage cover and that helps to strengthen their overall financial resilience.
Protecting the client now and in the future
Critical illness cover is often recommended alongside a mortgage, however because of budget constraints the level of cover won’t always match the mortgage anyway, regardless of how the client decides to use the money in the event of a claim.
The biggest drawback of traditional critical illness cover is also that cover ends after a claim has been paid in full. If it’s been combined with life insurance on an accelerated basis, they’ll lose that as well.
The client may have been able to pay off their mortgage, but they’re then left uninsured and potentially uninsurable, for any future protection needs that may arise.
We saw with Hayley’s recent story how serious illnesses can arise even at a young age and therefore cover may still be needed for many years after a claim has been paid.
Improvements in diagnostics and medicine also mean that whilst more people are likely to survive a serious illness, we’re seeing more recurrences or secondary illnesses arise. One in five cancers now for example are recurrences.
Its why it’s increasingly necessary that products are designed to pay-out multiple times, including in full.
By structuring a protection solution in this way, advisers can give their clients much more choice and flexibility in the event of a claim. Knowing that if they don’t pay off the mortgage immediately, they’re still covered if anything else arises in future.
The benefits of longer-lasting, severity-based cover
Breadth of cover is also crucial given the financial impact of serious illness, even if it’s caught early. This is where impact-based severity cover can be especially helpful, whilst still giving clients the peace of mind that if their condition is of the highest severity, they’ll still be paid in full.
With more people living longer, but often with later life care needs caused by conditions like dementia, it’s also crucial we provide clients with financial protection beyond the typical plan duration.
This is especially important when protecting assets like a client’s home, given how many people are often forced to sell their property to fund later life care.
Protecting the risks that are likely to arise
The high number of respondents in CIExpert’s report indicating they used or would use a pay-out to cover lost income2, also highlights why Income Protection (IP) must surely be seen as the cornerstone of good protection advice.
Mortality and morbidity risk analysis, as surfaced through tools like Vitality’s Risk Calculator also tells us that many clients are more likely to be incapable of working for a period of time due to ill-health or injury, than they are to die during the mortgage term.
Of course, the strength of IP cover lays in the fact the monthly benefit can cover the client’s overall household expenditure, including mortgage repayments, giving them much better protection.
The added flexibility and wider benefits that IP plans now offer ensure cover is far more relevant to a client’s needs, and can flex and adapt as the client’s circumstances change.
Immediate value
Whilst the benefits of having thorough protection in place are self-evident, the reality for many people is that it remains a grudge purchase that is ultimately ‘sold not bought’.
This is perhaps especially the case with mortgage clients, who are dealing with a significant financial outlay already. Protection insurance can also be seen as quite negative, at a time when the client is going through the excitement of buying a house.
Given ongoing economic challenges we’re all facing, it’s never been more important that as an industry we can demonstrate real, tangible value to consumers, as well as the peace of mind it offers.
This is where the growing range of additional benefits and rewards that protection plans now offer can be especially helpful, whilst unique policy options like Optimiser can help client’s secure comprehensive cover at a lower cost.
Vitality’s 2023 Claims and Benefits report shows that in 2022 we returned over £100 million to our customers through rewards and premium savings through Optimiser discounts. This meant is that on average Vitality customers saved 28% of their premium3.
These benefits also help to increase client engagement, improve retention and in turn help to add value to an adviser and their business.
So, with all this in mind, has there ever been a better time to re-examine the way we approach mortgage protection as an industry?Where to next?
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Continuous Critical Illness Cover has never been more needed
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Due to a range of external factors, there’s never been a greater need for cover to remain in place for longer after a claim has been paid, writes Director of IFA Distribution at Vitality, Justin Garbutt.
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We can no longer ignore later life care needs
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With an inexorable rise in conditions requiring later-life care and the public sector already under pressure, it’s time for the protection sector to step up and do more to support clients prepare for the future, writes VitalityLife Managing Director Justin Taurog.
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1. Vitality Life Risk Tool (vitalityriskcalculator.co.uk)
2. Critical Thinking Report, CIExpert 2024
3. VitalityLife Claims and Benefits Report, 2023