Borrowing with an easier mind

LOAN PROTECTION COVER

Loan and mortgage borrowers who try to insure themselves against sickness and redundancy may be paying for expensive cover they don't need.

They are being persuaded by banks and building societies to take out protection policies that can cost up to 20 per cent of the total amount they are borrowing over the repayment period.

Instead, they could be shopping around for far cheaper cover that more closely reflects their individual circumstances.

The position is likely to worsen in the wake of Government's crackdown on state benefits payable to unemployed people and those unable to work because of illness.

An estimated 1.5 million sick and disabled people will have their benefits reduced from April13, and from October all unemployed homeowners will face cuts in benefit paid to meet mortgage interest. Future home-buyers will also have to take out cover if their loans cost more than £100,000.

The costs of protecting against sickness, accidents or redundancy can be high. Repayments on a Barclays Bank personal loan of £5,000 over three years goes up from £173.08 a month to £197.58p when the protection insurance is added.

The £24.50 monthly insurance premium adds up to £882 over the three-year repayment term, including interest on the cover itself. For a £7,500 loan over five years, the cost goes up to £2,129.

For their money, Barclays customers are covered if they lose their job through no fault of their own, or through being unable to work because of sickness or accident.

The bank will cover the monthly loan repayment until the claimant returns to work or the loan period comes to an end. But for those out of work, the maximum claim extends for 12 months in any one period.

Loan protection insurance is a valuable source of income to lenders. Most are paid about 22 per cent of the premium in commission.

John Abbiss, assistant director and head of marketing services with Consolidated and Financial Insurance Group, the UK's biggest underwriter of loan insurance, believes the policies offer good value for money.

He said: "Loan insurances are offered to the mass risk market, irrespective of age, sex or occupation, and anyone who qualifies for a loan also qualifies for cover without any further enquiries.

"The cost reflects this, and I do not think the policies are expensive, given that we have to spread the risk.

But Roddy Kohn, a financial adviser at Bristol-based Kohn Cougar, said that loan and mortgage protection was no different from any other financial services product.

"Customers need to do two things. They should firstly look at their existing benefits, such as permanent health insurance, disability pensions, or any redundancy entitlements from the firm they work for.

"They may feel this gives them sufficient protection. If they are not sure, advice is always needed.

"Secondly, if it really is appropriate to buy this protection, shopping around is the best option," Mr Kohn added.

Banks and building societies are not allowed to put pressure on borrowers to take out the insurance.

The Office of Fair Trading stepped in last year, after complaints that lenders were using a "negative option" system, where borrowers were given cover unless they indicated on the loan application form that they did not want it

People who would continue to earn an income on a self-employed basis if they lost their job would find loan protection insurance of limited value because they are unable to register as unemployed.

A cheaper option is a low-cost, private health insurance. For example, a Barclays loan of £8,000 over four years would cost £37.39 a month to protect.

By comparison, Exeter-based Permanent Insurance, which specialises in private health insurance, said it would charge a 28-year-old male accountant £5 a month to provide income of £238 a month if he could not work because of sickness or accident. This rises to £7.10 a month for a 44-year-old office worker.

The income would be enough to cover the loan commitment. It has the extra benefit of continuing until the insured person reaches 50, unlike the loan cover, which stops when the loan repayments end.

Less controversial is mortgage protection insurance. At the moment, a homeowner receives half the monthly mortgage interest for the first 16 weeks of unemployment, and the full amount thereafter. The waiting period will be increased to nine months from October.

Halifax charges £6.90 for each £100 of monthly mortgage benefit. A 28- year-old office worker paying a £450 monthly mortgage could be insured against accident, sickness and unemployment for a monthly premium of £31.05. The monthly cost of permanent health insurance would be £7.91.

COST OF LOANS

COST OF BANK AND BUILDING SOCIETY PERSONAL LOANS, WITH (w) AND WITHOUT (w/o) INSURANCE

£2000 over £5000 over £7500 over

two years three years five years

Barclays (w/o) £102.62 £173.08 £178-03

(w) £114.88 £197.58 £213.52

Lloyds (w/o) £99.85 £174-80 £180.84

(w) £l10.40 £195.75 £218.33

Midland (w/o) £98.07 £170-82 £174.40

(w) £109.35 £193.02 £208-35

Halifax (w/o) £98.52 £177.32 £184.87

(w) £108.12 £198.19 £213.36

First (w/o) £100.42 £170.98 £173.14

Direct (w) £12.47 £193.89 £206.60