The Sunday Times 11/03/2012
Borrowers are being let down by specialist insurance policies that are supposed to take care of their debts if they die, lose their jobs, or cannot work because of illness or accident.
Experts say that up to half of claims made under payment protection policies, taken to protect against redundancy, are being rejected.
Bill Prasifka, the financial services ombudsman, received 199 complaints last year about mortgage protection insurance.
Lenders require this insurance for all home loans because it would clear their debts if borrowers die before the mortgage is paid off.
Some of the complaints are over policy additions such as critical illness cover. This is supposed to pay a lump sum if you fall ill but insurers will throw out claims if they suspect you concealed medical problems when buying the policy. “You must disclose pre-existing medical conditions when taking out critical illness cover,” Prasifka said.
Payment protection policies led to even more disputes, with the ombudsman receiving 405 complaints last year.
Many came from the selfemployed after their claims were refused because of suspicions they deliberately ceased trading to claim the redundancy cover, which should have paid their mortgages for up to one year.
Employees also lost out on the basis that they knew their jobs were at risk before taking out cover.
The Central Bank is widening an inquiry into the way that payment protection insurance is sold, after an initial investigation last year raised concerns about mis-selling.
Payment protection is expensive, costing about €6.50 a month for every €100 of mortgage payment — €97.50 if your mortgage costs €1,500 a month. It costs even more to add payment protection cover to an existing mortgage — about €9.75 a month for every €100 of mortgage payment.
Karl Deeter, of Irish Mortgage Brokers, said: “These policies are dogs that are not worth owning. They have a huge refusal rate [for claims]. You would be better off putting your money in the bank, building up a nest egg.”
Michael Dowling, of the Independent Mortgage Advisers Federation, believes that up to half of claims are rejected.
Colm Fitzgerald, an actuary at Dublin City University, said: “Policies are written by one party, the insurance company, which gives it a huge advantage over the lay person.”
Liam Carberry, a financial broker, said the exclusions are so sweeping that they can make it impossible to claim successfully.
“I have a client who is a self-employed manager with broad business experience,” he said. “His policy says it will pay out if the business closes down. But it also states that if he has “any education or knowledge in another trade or business”, the insurer won’t pay him.”
The Central Bank investigation will not include brokers, even though some targeted unsuitable candidates.
They should never have been sold payment protection cover because it does not pay out to those working in firms if there were redundancies before insurance was taken out.
John Geraghty of LABrokers, an online discount broker, said: “The fact that people began looking for cover when the bubble burst meant they knew their jobs were at risk.
“Once there was that doubt, the insurance companies could refuse to pay out. So why was this cover offered to people when they couldn’t possibly be paid?”
Financial experts predict more mis-selling complaints.
David McCarthy, of McCarthy & Associates Financial Consultants, in Galway, said: “These policies are an accident waiting to happen. They had been known about for years. It’s extraordinary how long it has taken the Central Bank to take action.
“In some cases people applying for mortgages had to ‘opt out’ if they didn’t want payment protection. Otherwise they paid for it automatically.”
Many existing policies made no attempt to exclude unsuitable applicants because they were not underwritten upfront.
Geraghty advised those now considering payment protection insurance to ensure from the outset that the policy will cover them in the event of redundancy.
“If the insurer cannot guarantee that it would pay out in the event of a claim, consider using the money instead to accelerate your payments on your mortgage,” Geraghty said.
There are fewer grey areas with mortgage protection insurance because it must pay out if the homeowner dies.
Many policies offer poor value, though, especially those bought from the bank or broker that sold the mortgage.
Geraghty said: “The cost of mortgage protection has come down considerably. Those taking out cover now will find it cheaper than four or five years ago.”
It is not advisable to buy cover from mortgage providers because they tend to offer the worst value.
You are free to switch to another provider at any time, although those aged more than 40, or with health issues, may have to take medical tests.
Lenders cannot force you to buy or to hold on to their mortgage protection insurance because the consumer protection code precludes linking the sale of one financial product to the purchase of another.
“If you are paying a fortune on insurance, you may be able to change your policy to save money,” Geraghty said. “Anyone who has taken out a policy in the past five years should be checking for better value elsewhere.”
Online brokers such as monitum.ie and LABrokers.ie search for the cheapest deals, and rebate most of the commission they receive from the insurance companies.
This means you may have little to pay in the first year of a new policy. With greater competition, there is scope to play off one broker against another to secure the best quote.
Do not be tempted to cancel the insurance if you are struggling to pay your mortgage. Cover is a condition of your mortgage contract and insurers will inform your lender if cover is cancelled.
'We pay gladly for peace of mind'
James O’Keeffe, 50, and his wife Helen, 46, pay €1,150 a month for mortgage protection insurance on the €3.2m they borrowed to buy and extend Borris Lodge nursing home in Co Carlow.
“We were paying €1,400 a month for this cover with Irish Life, and prior to that with Friends First,” said O’Keeffe. “Clear Financial [a financial adviser] offered us a new policy, through Caledonian Life, and we accepted. Clear Financial has shared its commission with us for the past three years. If we had stayed with our previous providers, we would be paying about €1,400 per month for mortgage protection.”
He believes the high cost is worthwhile, even though lenders are legally entitled to make the insurance a condition only of home loans. “If Helen or I, or both of us, died, the mortgage on the nursing home would be paid off,” he said.
The couple increased the level of cover in 2006 when they extended the building. “I borrowed an extra €3m to put into the business, extending the home from 31 beds to 52 beds, so the amount of cover had to go up in line with the size of the mortgage,” O’Keeffe said.
Source: The Sunday Times, 11/03/2012