Mortgage protection a question of policy

Tight household budgets are causing some people to cancel insurance policies on their mortgages and credit cards, just when they might need them most.

Mortgage and credit card insurance typically provide payment cover for a fixed period when policyholders are affected by events such as serious illness or redundancy, but attitudes to such protection appear to be diverging.

With unemployment rising and the risk of redundancy increasing, many people considered that such cover was essential and sales of new policies was rising, said Kiwibank communications manager Bruce Thompson.

But another group were taking the opposite view. They were taking a hard look at their household budgets and seeing credit card and mortgage insurance as a luxury they could do without. They were cancelling those policies to cut costs.

Thompson said it was always a concern when customers cut their insurance cover because this left them vulnerable if they suffered a sudden loss of income. Many of those who were cancelling their policies were probably most at risk of defaulting on payments if they lost their jobs.

While the bank could caution people about the risks of losing insurance cover, ultimately it was up to each customer to decide, he said.

The clouds of recession ae also providing a silver lining for niche insurers such as American Income Life (AIL), which provides low-cost whole of life insurance policies for people on modest incomes.

"During the last couple of recessions that I've seen, we've done well," AIL's New Zealand managing director Steve Friedlander said.

AIL is unusual in that it promotes its products mainly through trade unions and structures its policies to meet their members' needs. It waives premiums for up to three months for policyholders who are on strike or have been made redundant, allowing the cover to continue through periods of financial difficulty.

Policyholders do not need to make up the waived premiums once they return to work.

While most people hope never to use the benefit, it is one the company is providing increasingly often.

In cases where there is a major closure of a factory, AIL can have 100 or more policyholders from a single workplace taking advantage of the premium waiver at the same time.

Friedlander said the feature was a major selling point for the company and one that was becoming increasingly important.

He said the company was also winning business from people who had been on higher incomes and were belt- tightening because of the recession. Many were cancelling expensive income protection policies and taking out a cheaper AIL policy which would at least provide them with some basic cover during the hard times ahead.

AIL's policies are cheap because they offer a low payout aimed at covering the bare essentials such as funeral expenses, which could be a particular concern for Polynesian people who often face high funeral costs, and perhaps a bit more to clear credit cards and pay off debts to finance companies and the like.

A typical policy might provide a husband and wife each with $15,000 of cover for death from illness or natural causes and $35,000 cover for accidental death, for around $15 a week between them.

But the economic downturn is helping AIL in another unexpected way.

One of its biggest problems in recent years had been recruiting competent sales people because they need to visit prospective clients in their homes, which often involved working at night or on weekends.

But with the property and investment markets being so badly affected, AIL is now getting applications from experienced real estate agents, mortgage brokers and financial planners who need a career change.

"There's no work for them in their former jobs now. So the calibre of people we are interviewing has stepped up quite a bit," Friedlander said.