CeMAP Advising on Protection Products 2 — Questions and Answers

Question 1: What is the primary purpose of Mortgage Payment Protection Insurance (MPPI)?

To repay the mortgage in full if the borrower dies
To cover monthly mortgage payments for a limited period if the borrower is unable to work due to accident, sickness, or unemployment (Correct answer)
To protect the lender against borrower default
To cover the cost of home repairs

Correct answer: To cover monthly mortgage payments for a limited period if the borrower is unable to work due to accident, sickness, or unemployment

MPPI provides temporary cover for monthly mortgage payments if the borrower cannot work due to accident, sickness, or involuntary unemployment.

Mortgage Payment Protection Insurance covers the borrower's monthly mortgage payments (and sometimes related housing costs) for a limited period — typically up to 12 or 24 months per claim. It covers three main risks: accident (inability to work due to injury), sickness (inability to work due to illness), and unemployment (involuntary redundancy). Policies have an initial exclusion period (typically 30-90 days) before benefits begin. Pre-existing medical conditions are usually excluded. Self-employed borrowers may only get accident and sickness cover. The PPI mis-selling scandal highlighted the importance of advisers ensuring the product is suitable and the customer understands exclusions and limitations.

Question 2: How does decreasing term assurance work and why is it commonly recommended alongside a repayment mortgage?

The premiums decrease over time
The sum assured decreases over the term to broadly match the reducing mortgage balance, providing cost-effective cover (Correct answer)
The policy term decreases based on the borrower's age
It provides increasing cover as the mortgage balance falls

Correct answer: The sum assured decreases over the term to broadly match the reducing mortgage balance, providing cost-effective cover

Decreasing term assurance provides a declining sum assured that roughly tracks the reducing balance of a repayment mortgage, making it an efficient and affordable way to cover the outstanding debt.

Decreasing term assurance is a life insurance policy where the sum assured reduces over the term, typically in line with a repayment mortgage balance. At the start of the term, the cover equals the original mortgage amount. Over the term, as mortgage payments reduce the balance, the cover decreases accordingly. If the policyholder dies during the term, the payout should be approximately enough to clear the outstanding mortgage. Because the insurer's potential liability decreases over time, premiums are significantly lower than level term assurance. It is the most cost-effective way to ensure a repayment mortgage is cleared on death. However, it does not provide additional funds for dependants beyond mortgage clearance.

Question 3: What is critical illness cover and how does it complement mortgage protection?

It only covers terminal illness
It pays a lump sum on diagnosis of a specified critical illness, which can be used to repay the mortgage or cover costs during recovery (Correct answer)
It covers all illnesses automatically
It is the same as income protection insurance

Correct answer: It pays a lump sum on diagnosis of a specified critical illness, which can be used to repay the mortgage or cover costs during recovery

Critical illness cover pays a tax-free lump sum upon diagnosis of a specified serious illness (such as cancer, heart attack, or stroke), which can be used to clear the mortgage.

Critical illness cover pays a one-off tax-free lump sum if the policyholder is diagnosed with one of the conditions listed in the policy. Common covered conditions include cancer, heart attack, stroke, kidney failure, major organ transplant, and multiple sclerosis — typically 40-50 conditions. The payment is triggered by diagnosis meeting the policy definition, regardless of whether the person can still work. This can be used to repay the mortgage, fund treatment, or support the family. Critical illness cover can be standalone or combined with life insurance. It is more expensive than basic life cover because the probability of a claim is higher. The adviser must ensure the client understands which conditions are covered and any exclusions or waiting periods that apply.

Question 4: What is the difference between indemnity-based and benefit-based income protection policies?

There is no difference
Indemnity-based policies pay based on actual earnings loss, while benefit-based policies pay a pre-agreed fixed amount regardless of actual earnings at claim time (Correct answer)
Indemnity policies are cheaper
Benefit-based policies only cover unemployment

Correct answer: Indemnity-based policies pay based on actual earnings loss, while benefit-based policies pay a pre-agreed fixed amount regardless of actual earnings at claim time

Indemnity policies assess the actual income loss at the time of claim, while benefit policies pay the pre-agreed amount regardless of what the policyholder is earning when they claim.

Income protection policies come in two main types. Indemnity-based policies assess the claimant's actual earnings at the time of claim and pay a proportion (typically 50-65%) of that amount. If the claimant's income has fallen since taking out the policy, the payout may be less than expected. Benefit-based (or agreed value) policies pay the amount agreed when the policy was taken out, regardless of actual earnings at claim time. Benefit-based policies are more expensive but provide certainty. For mortgage protection purposes, the adviser should consider which type best suits the client — benefit-based is preferable for self-employed clients whose income may fluctuate. Both types typically have a deferred period (waiting period) of 4-52 weeks before payments begin.

Question 5: Why might an adviser recommend level term assurance for an interest-only mortgage?

Level term assurance is always cheaper than decreasing term
Because the outstanding balance on an interest-only mortgage remains constant throughout the term, requiring a constant level of cover (Correct answer)
Level term assurance provides better tax benefits
It is a regulatory requirement for interest-only mortgages

Correct answer: Because the outstanding balance on an interest-only mortgage remains constant throughout the term, requiring a constant level of cover

With an interest-only mortgage, the capital balance does not reduce over the term, so level term assurance maintaining a constant sum assured is more appropriate than decreasing cover.

With an interest-only mortgage, the borrower pays only interest each month and the full capital balance remains outstanding for the entire term. Therefore, the cover needed to repay the mortgage on death remains constant. Level term assurance provides a fixed sum assured throughout the policy term, perfectly matching this need. If decreasing term assurance were used instead, the cover would reduce while the debt stayed the same, potentially leaving a shortfall. Level term assurance is more expensive than decreasing term because the insurer's potential liability remains higher throughout. The adviser must match the protection recommendation to the mortgage type — decreasing for repayment, level for interest-only.

Question 6: What is the adviser's duty regarding protection advice during the mortgage advice process?

Protection advice is entirely optional and can be skipped
The adviser must assess the client's protection needs, discuss relevant products, and document the client's decision whether or not to proceed (Correct answer)
The adviser must sell at least one protection product with every mortgage
Protection advice is only required for first-time buyers

Correct answer: The adviser must assess the client's protection needs, discuss relevant products, and document the client's decision whether or not to proceed

MCOB requires advisers to consider the client's protection needs as part of the mortgage advice process and to record any discussion and the client's decision.

Under MCOB and the FCA's broader conduct requirements, mortgage advisers must consider the client's protection needs as part of the advice process. This includes discussing: life insurance to repay the mortgage on death; critical illness cover; income protection to cover payments during illness or disability; and buildings and contents insurance. The adviser must assess the client's existing cover, identify gaps, and recommend appropriate products. If the client declines protection, the adviser must record this clearly (often called a 'non-advice' or 'declined' record). Consumer Duty requires the adviser to ensure the client understands the risks of proceeding without protection. While the adviser cannot force the client to buy protection, failing to discuss it could constitute a breach of duty.

CeMAP Advising on Protection Products 2

What is the primary purpose of Mortgage Payment Protection Insurance (MPPI)?

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