Don't rush to buy MPPI

News that Norwich Union is refusing to sell mortgage payment protection insurance (MPPI) to Rover staff in Birmingham is a prime example of insurer 'cherry picking', but it's also worth considering if this type of insurance is even worth having.

MPPI is not the right insurance for everyone with a mortgage. The Financial Services Ombudsman has said it is expecting a 20% rise in complaints on the issue this year linked, including many who have lost their jobs but had claims rejected.

For example, MPPI, frequently does not cover people who lose their jobs as a result of stress-related illness. Furthermore, MPPI usually pays out for just a year - yet some policyholders are under the impression it will cover their mortgage until they find another job, even if this takes longer.

Before anyone considers buying the cover, they need to be clear that they understand exactly what it is and whether it is being offered at a fair price and what the alternatives are.

First time buyers, in particular, should beware of pressure selling tactics from advisers and lenders.

MPPI will usually cover the monthly mortgage payments for up twelve months, starting one or two months after an accident, illness or unemployment happens. Some policies will only protect against redundancy and so are cheaper. This can be useful in households that rely on a single income, although in areas of high unemployment, 12 months may not be long enough to find another job, or might not be enough to cover time off work though an accident or sickness.

Despite its limitations, sales of MPPI are rising. At the end of last year, around a third of all new mortgages were protected by the insurance. The government is also keen for sales to grow to stop reliance on the state. And certainly MPPI is an improvement on the state's provisions.

Those on income support or jobseekers allowance have to wait 26 weeks before receiving assistance with eligible mortgage interest, if their mortgage pre-dates October, 1995.

For the first eight weeks, they receive no assistance at all and the next 18 weeks they get up to 50% of the eligible interest.

Borrowers taking out a mortgage after October, 1995, would have to wait 39 weeks obtaining full assistance with mortgage interest and in the meantime receive no help at all.

Stephen Devine, general manager of corporate communications at Pinnacle Insurance, one of the main MPPI providers for high street lenders says: "This is a product designed to be a sticking plaster. It is essential those buying it realise it is short term and is meant to keep you afloat until you find another job."

He explains that the average person who is made redundant takes around 150 days to find another job and adds that one in five people will become unemployed at some stage of their working lives.

But, it is also worth remembering there are alternatives. Siobhan Hotten, marketing manager for mortgage advisers, John Charcol says: "We do recommend MPPI for some people, but it is not suitable for everyone. In some cases, redundancy cover on its own is cheaper and more relevant if other benefits are supplied through work."

She believes critical illness cover provides far greater peace of mind if someone becomes seriously ill such as with a heart attack or cancer as MPPI does not cover for a long enough recovery time. Income protection is another option. It pays an income - typically around 60% of salary - until the claimant returns to work or retires. Like critical illness cover, this will cost more than MPPI, although is viewed by many as more valuable.

The average price of MPPI is around ?5.60 per ?100 of benefit to be paid. But, there are variations. Marks & Spencer Financial Services is well priced at ?4 per ?100 of benefit, while the cheapest in the Market Harborough Building Society sells the cover at ?1.75 per ?100 - little more than its cost value - but this is only available to those taking out a Market Harborough mortgage.

Market Harborough has defended its stance and says there is an argument for compulsion, according to spokeswoman Alison Dodd. She says the cover helps prevent arrears and its customers having to rely on state benefits.

But, it is also worth remembering that having the insurance in place is not a guarantee against repossession. A survey by Mortgage Finance Gazette found 47% of lenders would continue with repossession even if the homeowner had the cover.

Details on MPPI can be found on the Association of British Insurers' website.

Checklist before you buy MPPI



What is the cost?
Compare your quote against the average price of ?5.60 - and this is the top end of average - per ?100 of benefit. If the cover is very cheap, check to see if there is a longer waiting period before you claim. 30 days is average. If you have savings, it may be worth buying a cheaper policy and waiting 60 days.

Are you considering becoming self-employed?
Check if the cover would still be valid (unlikely).

Do you have any health problems?
This again could invalidate payment.

Look at other options
Critical illness or income protection insurance can be an alternative.

Don?t forget that MPPI is only a short-term product.
It is unlikely to pay out for more than 12 months.

What other benefits do you have through work?
If your health is covered, it could be cheaper to buy redundancy only cover.

Consider seeing an independent financial adviser before buying MPPI.