Addressing this may require changes to product design, enabling an individual to split their benefit so the mortgage element goes directly to the lender. This may be relatively straightforward to implement. Many of the IP insurers also offer MPPI, where assigning benefit to the lender is common practice, so the mechanics for this should already be in place.
Peter Hamilton, head of market management at Zurich, agrees. “We do need clarification on what evidence the DWP will require to disregard the mortgage element of the IP benefit, and I would argue for something as simple as showing a mortgage statement. Paying it directly to the lender would not require any material changes, but it is easier to pay the full benefit to the customer.”
Practical issues
Keeping the policyholder as the sole benefit recipient also addresses a number of practical problems. Mortgage interest payments can fluctuate in line with interest rate changes or as the capital is repaid on a repayment loan. And with remortgaging much more common, the lender could potentially change too.
This is less of an issue with a short-term MPPI product, which can be linked to the lender in the event of a remortgage or adjusted as rates change, but David Hollingworth, associate director of communications at L&C Mortgages, says these factors could cause substantial issues for IP: “Will the borrower need to update the insurer every time they remortgage? It would mean the adviser could add more value ensuring protection is up to date, but it would create much more administration.”
Demonstrating the benefit is intended to cover mortgage interest could be supported in other ways, too. For example, Mr Timpson says that using an appropriate product name could add weight to the argument.
“If an insurer is offering an IP product that covers the mortgage, give it a name that reflects this,” he says. “Being clear about what the product is intended for will help consumers, but will also make it easier for the DWP to recognise the intent.”
As well as ensuring future products offer the necessary proof of intent, existing IP clients may also need help to enable them to benefit from the disregard. This is particularly the case for those who are already claiming, who may require supporting evidence such as the initial report from the adviser or a statement from the insurer to demonstrate the product was taken out to cover mortgage interest.
Next steps
Having this disregard for mortgage payments is a significant step forward for the protection industry, but the Building Resilient Households Group is campaigning for further changes from the DWP. In particular, it would like to see the disregard being extended to rent payments.
