Which insurers go the extra mile in covering interest rate options on mortgage protection plans?

CPD: In reading this article you will understand:

• Why policy interest rates matter when it comes to mortgage life insurance
• What interest rate options different insurers offer
• Which insurers offer more flexibility when selecting the right interest rate, or features to ensure the mortgage is fully repaid if the mortgage rate changes

Mortgage protection plans can be more complex than you might imagine. Not everyone recognises that plans will typically pay off the mortgage up to a certain maximum interest rate.

If the interest rate on your plan is not high enough you can have a small residual amount that might not be covered when it comes to a claim. With mortgage rates having been more turbulent in the last few years this is a key point to check not only for new plans but also when reviewing a clients existing plan. This article explores which insurers offer the best level of cover in this context.

The 2 years since we last looked at this subject has been a turbulent time. Some key protection players have withdrawn from the market or been taken over. So, what’s changed and who’s showing the most flexibility for their customers?

The current economic climate poses a number of challenges for the protection industry, from the affordability of products, to ensuring clients have access to the help and support needed if they are struggling. At a product and policy feature level, it’s also important to ensure the protection solutions clients do have in place are fit for purpose. Clients facing mortgage rate rises will need to ensure any protection products they have in place still provide adequate coverage, should the worst happen and they need to claim.

When arranging a mortgage life insurance plan in the first place, most portals allow advisers to input a required interest rate during the quote process. Typically this will be higher than the actual mortgage rate, usually because the insurer defaults to a higher base policy rate (see the table below).

It may appear logical to simply match the life insurance policy interest rate with the mortgage rate, but taking that approach provides no flexibility if rates increase. This risks a shortfall between any life insurance payout and the outstanding mortgage balance. This is something every protection adviser would have experienced over the last few years.

Selecting the correct policy rate can be challenging. It’s not always clear what rate should be selected from the outset, and of course the higher the rate, the higher the premium. For some advisers their firm or network compliance department may stipulate what rate should be selected (typically in our experience the industry standard seems to be around 8%).

The table below lists the current interest rate options each insurer offers and as we can see, there are still some variations in the options available, within a range of 1-20%. Advisers will need to select the rate they deem appropriate from the outset.

What’s changed since September 2022?

Guardian’s ‘Mortgage Guarantee’

As covered by Protection Guru earlier this year (Guardian Life Essentials Now Live: Is it sad that Guardian need to launch this product?) , Guardian launched their neweest product (Guardian Life Essentials) as a “Low-Cost” life only policy which was designed to target price sensitive clients affected by the cost of living crisis.

Possibly due to recent events and the sharp rise and subsequent fall in interest rates this feature has become prohibitively expensive and as such Guardian made the decision to remove it from all plans. Going forward the interest rate used for decreasing plans will be 8%.

Of the remaining insurers who do require a rate to be set from the outset, Scottish Widows still offers the most options, with interest rates of between 1-18%.

Mortgage Guarantee

Royal London are now the only insurer who goes further than other insurers in that they also provide a ‘Mortgage Guarantee’. This is a feature that acts as a safety net within a decreasing mortgage protection plan. It guarantees to pay out the value of the outstanding mortgage at the time of the claim, as long as the amount and term are the same as they were at the start of the policy and the mortgage is not in arrears at the time of claim.

As mentioned previously, advisers would ideally want the interest rate attached to the decreasing life cover protecting a mortgage to mirror the mortgage from the start and throughout the term. As this is not always possible or advisable though, a mortgage guarantee offers the best possible solution. This ensures that whatever happens the mortgage balance is repaid in full in the event of a claim and the adviser and their client don’t need to worry about altering the policy if their mortgage rate changes.

Overall Royal London stand out as the top pick. Whilst Royal London offer an extensive range of rates to choose from, where they really standout is in offering a mortgage guarantee, that futureproofs the policy and ensures that whatever happens, the clients mortgage is repaid in full if a claim did arise. Scottish Widows deserve a mention for offering he widest range of interest rate options. Royal London take the crown though for offering the Mortgage Guarantee.

Want to learn more? Click on the links below for additional articles surrounding this topic:

Guardian Life Essentials Now Live: Is it sad that Guardian need to launch this product?

AEGON exit disappointing for market competitiveness

What impact will mortgage rate rises have on life insurance cover?