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Relief for homeowners as private insurance won’t impact state benefits

Paloma Kubiak
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Paloma Kubiak

Homeowners who choose to take out insurance to cover mortgage payments in the event of illness no longer need to worry the payouts will lead to state benefits being cut.

Recent changes to Support for Mortgage Interest mean homeowners can no longer rely on free government support to pay their mortgage interest. But this change also left a grey area for households with separate protection insurance as they feared these payouts would make them ineligible for other state benefits.

The Department for Work and Pensions (DWP) has now clarified its position on how protection insurance payouts effect eligibility of state benefits.

Housing benefit changes explained

There was a big change to housing benefit from 6 April 2018 when the government implemented a loan style arrangement rather than a free benefit to cover Support for Mortgage Interest (SMI) for those claiming benefits such as Pension Credit, Income Support and Universal Credit.

This means people who suffer a loss of income from sickness can no longer get a free payment, but may qualify for a loan. As such, these payments need to be repaid when the property is sold or transferred into new ownership. Essentially DWP can put a charge on the property.

Many homeowners take out protection insurance, such as income protection or mortgage payment protection insurance as a safety net should the worst happen.

But, the issue with this was that payouts from private insurance claims could have been taken into account when income was being assessed for other benefits. Overall, this could have resulted in a negative impact for claimants.

As an example, you would get your mortgage paid but you may not qualify for means-tested benefits or Universal Credit because of the payment, meaning you’re worse off overall.

DWP clarifies position

Following the changes and the possible negative impact for low income households, the Income Protection Task Force (IPTF) and its Building Resilient Households Group (BRHG) sought clarification from DWP about how payouts from protection policies would be treated under the new system.

The government has now confirmed that any income received from an insurance policy which is specifically intended and used to cover mortgage payments will be totally disregarded when entitlement to means-tested benefits is assessed.

This applies to both legacy benefits and Universal Credit claimants.

Good news for homeowners but niggles exist

If insurance pay-outs are solely intended to pay the mortgage, such as being paid direct to the lender, these payments should be completely disregarded for the purpose of assessing any state benefit claims.

But if the claimant has a choice over how they can spend the payments, then DWP will only disregard the portion that is used to cover mortgage payments.

Further, if a claimant applies for SMI, their private insurance payout will be taken into account when the offer of a loan is considered. But the IPTF and BRHG said this scenario isn’t likely to be common as people wouldn’t need the government loan while receiving insurance pay-outs which cover the mortgage.

Another point to note is that DWP is yet to clarify its position in the treatment of lump sum payments, for example those received from a critical illness or life insurance claim.

Limitations of state benefits

Martin Sincup, head of propositions at income protection specialists, Holloway Friendly, said this is a positive step but DWP needs to be pragmatic and reasonable in its interpretation of when customers are using income protection to pay for a mortgage, without onerous evidence.

He said: “Those who do have income protection need to be treated fairly and we need to help ensure people are not penalised for taking positive steps to protect themselves. We also believe that rental customers have similar needs, and we are hopeful that the next move would be that a similar policy could be applied to them.

“However, it’s important that everyone is aware that income protection can offer a far superior financial safety net to state benefits. For example, plans can be set up so that they pay out if you can’t do your own job, whereas state benefits only pay out when you are unable to work in any job.

“State benefits also often have a complex and uncertain claims process, whereas income protection is usually far quicker, more personalised, and often offers back to work support. Finally, it’s imperative that consumers remember that state benefits can, and often do, change over time (e.g. change in government) while income protection provides a certainty of what you will get and when, thanks to a long-term contract.”