Is it time to stop paying protection?

With a mortgage comes mortgage protection - a simple life assurance policy designed to pay off the outstanding amount of the mortgage should you die before clearing the loan.

Mortgage protection, unlike payment protection, is compulsory for borrowers under 50. The amount of cover reduces each year in line with the decreasing balance on the mortgage.

If the borrower lives to the end of that time, or if the policy is surrendered, no benefit will be paid. Unless the borrowers want extended life assurance cover, the term of the mortgage protection policy should match the term of the mortgage. But what if you pay your mortgage off early?

Earlier this week, the new financial services ombudsman, Joe Meade, released details of a case where a borrower had repaid her loan early but had continued to pay for mortgage protection.

The complainant's case was that the premiums taken by direct debit from her bank account in respect of the mortgage protection policy after the mortgage was redeemed should be refunded.

The insurance company's case was that as the policy remained in force, it was liable to pay the sum assured in the event of her death.

Some borrowers do continue with this relatively cheap form of life assurance even when the mortgage is repaid, the ombudsman pointed out.

The ombudsman was satisfied that the complainant was sufficiently aware that the policy was still in force, as the insurer had sent her annual statements and continued to take direct debits from her account. As a gesture of goodwill, the company offered to refund a portion of the premiums.

The ombudsman did not uphold the complainant's claim to a full refund of the premiums. However, noting the lack of information in the policy documentation about how to cancel a policy, he recommended that the goodwill gesture be increased.

As a result of the case, Mr Meade has written to the financial regulator recommending that mortgage lenders be obliged to give consumers more information about how to cancel mortgage protection policies in cases where loans are paid off early.

"There should be a procedure put in place so that borrowers are told that they no longer need mortgage protection, but they can keep it on if they want to as a cheap form of life assurance. But in this case, she was still paying for a policy that she didn't really want," Mr Meade said.

Mortgage protection issues also crop up when borrowers seek to switch lenders or borrow an increased sum. If their cover is part of their existing lender's group scheme, they will have to take out a new policy if they switch lenders.

As premiums are based on the person's age at the time of applying, this could lead to increased costs. If they have developed a health problem since they took out their first policy, the premiums for the new policy could jump.

Taking out an independent policy from a broker or direct from an insurance company will thus offer borrowers more flexibility and may also save them money.