Clarification from the Department for Work and Pensions (DWP) that it will exclude mortgage-related protection payouts in state benefit assessments is great news for the insurance industry. But while this should lead to an increased take-up of income protection (IP), insurers will need to ensure product design meets the DWP’s conditions.
The interaction between protection payouts and state support has long caused frustration for insurers and advisers. As state benefits are clawed back pound for pound when IP is in place, this can create a disincentive to take out cover.
Need for protection
Although the Building Resilient Households Group has campaigned for protection to be excluded from benefits calculations for a few years, the issue came to a head when changes to state support were introduced in April 2018. These transformed support for mortgage interest from a benefit payment to a loan.
This loan can be taken out to cover the interest on up to £200,000 of an outstanding mortgage, and is repayable with interest, currently at a rate of 1.7 per cent.
Ron Wheatcroft, technical manager at Swiss Re, says this is a totally different proposition from a claimant’s perspective. “Taking out a loan to cover mortgage interest will lead to an individual’s debts spiralling, making it even more important to take out protection,” he explains.
“Having clarification from the DWP that any income from an insurance policy taken out to cover mortgage interest will be totally disregarded is a step in the right direction.”
This clarification should help to increase sales of IP. Although some advisers include IP in mortgage advice, the change in state benefits, coupled with the reassurance of the disregard, will make it a much more compelling proposition.
It is also positive that it puts IP on an equal footing with mortgage payment protection insurance (MPPI), which has always had an exclusion from benefits means-testing.
“IP can offer much better protection than MPPI,” says Johnny Timpson, financial protection specialist at Scottish Widows Protect. “It is underwritten at outset rather than at claim and can provide cover for a much longer term.”
Conditions attached
In spite of these positives, the DWP also attached a couple of conditions that may require further attention. One of these is that an individual’s insurance payout will be taken into account if they apply for a support for mortgage interest loan. While important to note, in practice, this is unlikely to affect many people as having protection to cover mortgage payments would usually negate the need to take out a loan.
The other condition may prove to be more taxing. This states that any income from a protection policy “where it is specifically intended and used to cover mortgage repayments” will be disregarded. Where the individual has choice over how this income is spent, the DWP will judge how much is intended for mortgage payments and should therefore be disregarded.
While this works perfectly well with MPPI that is assigned to the lender to cover the loan, it creates uncertainty for IP as the benefit is paid directly to the policyholder.
