Byline: RICHARD DYSON
MILLIONS of mortgage borrowers have insurance designed to cover their monthly repayment if they are made redundant. It seems a sensible move and the Government has encouraged its take-up. But this cover, which only took off in the past decade, has never been tested as rigorously as now, with unemployment at record highs and borrowers remaining out of work for longer periods.
Between mid-2008 and mid-2009, insurance claims for unemployment doubled. And although insurers say the number of new claims has dropped in the past six months, payouts are being made for an average seven months, up from four in 2008, as claimants struggle to get back into work.
Behind the scenes, insurers are either pulling out of the market or trying to pass on higher costs to policyholders. As Financial Mail first reported last April, as the recession gained momentum many insurers, including the Post Office, moved to protect their profits by pushing up premiums or cutting back on cover.
The Financial Services Authority acted in October, forcing insurers to refund these increased premiums or reinstate cover. Those refunds are still being processed.
But insurers promised to keep premiums at existing levels only until this year. With that deadline passed, many are now working on new letters to tell policyholders that premiums will rise in 2010.
But an increase in cost at the worst possible time is not the only problem with these complex insurance plans (see below for an explanation of how they work).
Making a successful claim can be difficult - as legal secretary Carol Wilcock found out. Like many, the 49-year-old divorcee from Warrington, Cheshire, has had a difficult recession.
She was made redundant from a Manchester law firm in October 2008 and was out of work until last March when she found a job with another legal practice. But she lost this job when the firm folded last October.
Carol pays [pounds sterling]500 a month for the mortgage on her semi-detached house, but since 2007 she has had a policy with Paymentshield, the biggest independent provider of this type of insurance and she contacted them at once. 'I knew how it worked and I was grateful I had it,' she says.
But Carol was in for a shock. Although she was able to provide her P45 and other evidence showing that she was out of work, her previous employer could not be contacted to sign a crucial document proving she had been made redundant.
Insurers need this to confirm that a policyholder has not been dismissed for misconduct (see below). But in Carol's case, even with the help of the Law Society, her old boss could not be traced.