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Protecting your income from peril of job loss

More than nine out of 10 mortgage holders would be unable to meet their monthly repayments and other basic household expenses if they stopped earning - and the PPI scandal is partly to blame.

perfect PRODUCT: Internet entrepreneur Ian Templeton who protected his mortgage and other household outgoings. Picture: Steve Cox
perfect PRODUCT: Internet entrepreneur Ian Templeton who protected his mortgage and other household outgoings. Picture: Steve Cox

A survey by protection provider British Money found that less than 3% of those taking out new mortgages and only 5% of existing borrowers have insurance cover for their bills if they become unemployed.

This means the majority would have to rely on savings until they started working again.

If the cash ran out, they would fall into debt and could ultimately lose their home.

Simon Burgess, director of British Insurance, said: "Last year, over 1.26 million loans were advanced to first-time buyers, those moving up the property ladder and people re-mortgaging their homes. It's frightening to think 1.2 million of these could go into arrears."

Income protection insurance, designed to pay mortgage, council tax, utility and food bills if money stops coming in because of unemployment, illness or accident, is widely available.

Yet only 3% of new borrowers taking part in the survey had cover, while 46% said they didn't know it was an option because it wasn't discussed or offered by their lender.

A further 27% thought it was unnecessary as they wrongly believed the state would step in if they lost their job, and 24% said they would never buy the product as it had a tarnished reputation.

Mr Burgess said: "Lenders are asking borrowers to jump through hoops to provide evidence they can meet their financial commitments before offering a mortgage, but are not offering support mechanisms when they can't."

He puts this is down to their desire for profit at all costs. "Lenders are happy to turn a blind eye to the risk of arrears and repossessions, because they make more money selling life and critical illness insurance than income protection.

"About 45% of people taking a new mortgage will take life or critical illness cover and only 3% take income protection, yet they are more likely to need to claim for unemployment than to have a critical illness or die while they have a mortgage."

Anyone who thinks the state will take the strain is sadly mistaken. Basic weekly unemployment and sickness benefits start at just £71.70. Although help with mortgage payments is available, this extends only to the interest component, doesn't kick in for 13 weeks and is capped at an annual rate of 3.63%. There is no state help for arrears or to repay the capital owed.

And, Mr Burgess says, there are credible rumours that from April, 2015, mortgage interest support may be changed from a benefit to a loan with a 39-week delay and interest at up to 8%.

Payment protection insurance, or PPI, was intended to meet credit card, personal loan or mortgage repayments if the borrower stopped earning because of job loss or ill health.

For many years, lenders routinely sold vastly over-priced policies that were inadequately explained, riddled with exclusions and unsuited to borrowers' needs. Often they were self-employed, retired or already long-term sick, meaning they would never be able to make a successful claim. Others didn't even realise they had been charged for cover or that it wasn't compulsory.

Income protection is not the same as PPI and is intended to cover more than a single form of repayment.

Tom Baigrie, chief executive of independent online broker LifeSearch.co.uk, said: "Income protection covers the one thing we all need, our income. It pays a tax-free monthly sum until you either return to work or retire, and unlike PPI, it isn't riddled with exclusions.

"When looking for income protection, you should make sure to buy 'own occupation' cover, which means you are covered if you can't do your own job, and speak to an independent broker if you have any questions."

This type of insurance covers long-term illness or injury, but not unemployment. Cheaper short-term policies are available for those who can't afford indefinite cover or who want unemployment protection.

Mr Burgess, for years one of the chief whistleblowers on PPI mis-selling, said his company's Universal Cover provided a tax-free monthly payout for up to a year for mortgage and other household bills on becoming unemployed or unable to work because of accident, ill health or being required a carer.

Universal Cover was initially available only to those who had taken out a home loan within the past 30 days, but from this month it will be extended to all mortgage borrowers. There is a flat-rate monthly premium of £4 for every £100 of cover up to 60% of gross income or £2,000 a month, and it is open to the self-employed and contract workers as well as employees, regardless of age or occupation.

Mr Burgess said: "This will help rebuild the reputation of providers in the mortgage insurance sector by doing what so many of their products in the past should have done: pay claims."

For more information on choosing protection products, visit independent website Moneyadviceservice.org.uk

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