Practice of Insurance and

Mortgage Lending Theory

Lecture 1 & 2: Associated Products / Insurance -
Assurance
 Types of Insurance
 Mortgage Payment Protection Insurance
(MPPI)
 Accidents, Sickness and Unemployment
 Life Assurance & Health Insurance
 Term Assurance (Level term or Decreasing
term) -
 Critical Illness Cover
 Income Protection Insurance
 Buildings & Contents Insurance
 Higher Lending Charge
 Mortgage Payment Protection Scheme
(MPPI or PPI)

 Annually renewable general insurance policy paying a

monthly benefit equivalent to the monthly mortgage
payment if the insured is unable to work due to:
 Sickness
 Accident or disability
 Involuntary redundancy.
 Available for both employees and self-employed (subject
to conditions).
 Maximum benefit period: 24 months.
 Questionable selling practices in the past.
 Accidents, Sickness and Unemployment (ASU)

 Virtually identical to PPI but not exclusively designed to

cover mortgage costs.
 Benefits can also include repayments of rent and bills in
case of accident, sickness and unemployment.
Range of Cover
Capital &
Interest
Mortgage
Example
Interest Only
Mortgage
Example
 Life Insurance & Health Insurance
Term Assurance

 Life insurance to ensure that the loan (normally a mortgage) is

repaid in case of borrower’s death within the mortgage term.
 Recommended for all mortgages that do not have a built-in
insurance policy.
 Decreasing term insurance for capital repayment mortgages
(mortgage protection policy).
 Level term insurance in case of ‘interest only’ mortgages.
 Whole of life cover: protection extended beyond the loan
term, until the insured’s death, whenever that occurs (more
expensive).
 Waiver of premium benefits at extra cost.
 Life Insurance & Health Insurance
Critical Illness Cover

 Provides a lump-sum benefit should the insured be diagnosed

with one of a range of serious illnesses (see next slide).
 Can be sold as a standalone policy or in combination with life
insurance.
 No requirement that the illness should result in disability.
However, many policies provide total permanent disability
cover (TPD).
 The insured should usually survive for a minimum period of
time (e.g. 28 days) following the diagnosis before the CI
cover benefit pays out.
 List of illnesses typically included in
Critical Illness Cover

 Heart attack  Paraplegia or paralysis

 Stroke  Loss of limbs
 Cancer  Multiple sclerosis
 Coronary artery surgery
 Major organ transplant Example: Aviva
 Kidney failure
 Alzheimer’s disease
 Life Insurance & Health Insurance
Income Protection Insurance (IPI)

 Also know as Permanent Health Insurance (PHI).

 Provides monthly payments of up to 50% - 60% of the
insured’s lost (gross income) due to accident or illness.
 Cover up to the client’s retirement age.
 The insured has to be off work for a certain period (deferred
period) before benefits can be paid. Usually, 4 - 104 weeks.
 The longer the deferred period the cheaper the premium.
 The policy defines the degree of disability required before the
benefits become payable.
 Insurer can’t cancel the policy or increase premiums
regardless of how many claims are made.
 Buildings Insurance
 It is usually a mortgage condition to insure the property
against a range of perils (see next slide).
 If the lender specifies the insurer with whom the property
must be insured, the cost must be included in the APRC.
 The building should be insured to the cost of rebuilding to the
same design and specification (reinstatement cost) – different
from the property’s market value.
 The buyer is committed and must complete the transaction
even if the property is damaged before completion date.
 Most lenders offer block policies that combine buildings and
contents insurance → max property value limit.
 Most common risks & costs
covered by building policy

storm
fire explosion & flood
earthquake
accidental
water damage
subsidence debris
escape
removal
public liability
break-in
riot &
vandalism theft
 Underinsured Property
‘Average Clause’ Example

The owner of a £120,000 value property has buildings cover of

£90,000 and submitted a claim of £10,000 for damage caused by
the recent storm Dennis. The policy has an excess of £500. How
much will the insurance company be prepared to pay to the
owner?
 The owner effectively has 75% cover = £90,000 / £120,000.
 The claim will be reduced proportionately to the level of
under-insurance.
 Therefore, the claim paid will be £10,000 ×0.75 = £7,500
minus the policy excess (£500) = £7,000
 Contents Insurance
 Provides cover for the insurer’s belongings against loss or
damage due to the same risks as the buildings cover.
 Lenders have no interest in the safety of such item, so the
decision is entirely up to the borrower.
 The insurance can be arranged as a stand-alone policy, or as a
combined buildings and contents policy → lower total
premium.
 Accidental damage to belongings while outside the property
can be included at extra premium (“all risks” policy).
 Limits may apply with regard to the value of single items.
 Higher Lending Charge
 An additional charge where a high proportion of the
property value is to be advanced.
 Used to buy insurance to cover the risk that the proceeds
of a forced sale being insufficient to repay the outstanding
mortgage → for the lender’s protection.
 The insurance will pay an amount to the lender equivalent
to the shortfall.
 A 20% excess may apply to prevent lenders making
higher risk loans.
Higher Lending Charge
Scale
 High Lending Charge - Example
Adam has applied for a £100,000 mortgage to buy a property
that costs £110,000. What will be the higher lending charge on
the loan?
 LtV = £100,000 / £110,000 = 91%. A 6% charge will apply
on the amount above 75% LtV.
 75% LtV = £110,000 ×0.75 = £82,500
 Therefore, the higher lending charge will be =
(£100,000 - £82,500) ×0.06 = £17,500 ×0.06 = £1,050.