Why mortgage protection insurance isn't the answer to your worries
In these worrying times, you might think mortgage protection insurance is a great idea. In theory it is, but in reality it is one of the five most useless types of insurance there is.
This article is taken from Merryn Somerset Webb's free weekly personal finance email, Money Sense. Sign up to Money Sense now.
Scared consumers means free money for insurers
And as for prices, remember how this time last year it was considered bearish to even suggest that they might flatten out? Today that would be a ludicrously bullish view. Consensus is a fall of 10% and bearish is a fall of 50%. All this means that it is getting very hard for anyone, from Gordon Brown down, to pretend that there isn't a serious economic contraction ahead of us. Indeed there is already a heap of evidence to suggest this downturn has already begun.
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Consumer confidence is not far off the all time lows reached in the early 1990s and news of job losses are coming thick and fast. Worse, these losses aren't just in the estate agency, construction and financial sectors either. If you work in the sofa sector, you're probably very close to being unemployed already, for example. The same goes for anyone working in any other business selling non-necessities. Note that the UK's largest car dealership Pendragon has just laid off 500 people.
It's worrying stuff - something that is great news for the insurance sector. There's nothing insurance bosses like more than the knowledge that consumers are getting scared. Scared people take out insurance and insurance, more often than not, is both overpriced and useless. We see buying it as peace of mind. Insurers see it as free money.
Mortgage protection insurance - a great idea in theory
Take mortgage protection insurance, which has recently become, one of the most searched for products on comparison websites, says the Daily Mail. Seems like something you'd want right now, doesn't it? After all, with transactions in freefall and prices falling you won't be able to sell your house in a hurry if you lose your job and can't keep up your payments.
And even if you do manage to sell it, there's an increasingly strong chance that the price you get for it won't cover your mortgage debt - particularly if you bought in the last two years, or if you have been using your house as a cash machine to fund your sofa buying habits. So it makes sense to want some kind of insurance that will make your payments for you if you find yourself joining the ranks of the newly unemployed or if you find yourself too unwell to work for whatever reason.
Unfortunately MPI probably isn't that insurance. According to consumer pressure group Which? MPI, along with mobile phone insurance is one of the "five most useless" types of protection there is.
Why MPI is probably a waste of your money
Why? Firstly because it doesn't pay out very often. Overall a mere 21% of claims end up being paid out. It usually won't be paid out if you lose your job within six months of taking it out and not all illnesses (particularly stress related problems and back ache) are always covered by it. You'll also find that it is utterly useless if you are self employed, work on short term contracts, haven't been continually employed for six months, find that you are unable to work due to a pre-existing medical complaint, are over 64, work part time and so on and so on. We're talking pages and pages of small print.
That means that 79% of the people who take out MPI end up not with peace of mind but with crippling financial problems and very possibly nowhere to live. They're also usually paying far too much for their useless cover.
Why it's worth looking at independent providers
The High Street banks charge up to five times as much in premiums as the few independent providers out there (see www.britishinsurance.com or www.paymentcare.co.uk) and Which? says homeowners are wasting "millions" on over priced premiums. Finally, it is worth noting that even if you find a cheap policy and manage to hang on to your job and your health for six months afterwards and then somehow get your self a payout, most policies will pay your mortgage for no more than a year.
That's nice, but does it really make the risks involved in paying for this insurance worth it? If you get made redundant you should get a good few months of pay anyway, and most employers (85% or so) offer more than statutory sick pay as well. This means you are likely to have six months grace even without MPI. You can of course also get state help with your mortgage interest after 39 weeks of unemployment. There are also millions of people out there who can perfectly easily meet their mortgage payments even without a job - if you have savings (which you should have) or a partner with a good income or even a flexible mortgage that lets you take payment holidays, you probably don't need MPI. So don't let your mortgage lender bamboozle you into paying for it. To find out about other insurances that might suit better, see Why most sickness and unemployment insurance is a waste of your money.
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