A timely reminder of the importance of income protection

This change in government policy has crept up on homeowners and the insurance industry alike.

The SMI scheme enables qualifying homeowners on low incomes to receive help towards the interest payments on their mortgage, or on any loans they’ve taken out for repairs and improvements made to their home.

Previously, SMI was paid to eligible homeowners as a benefit, but as of 6 April this changed to a government loan secured against their property, that must be paid back with interest.

Anyone who was claiming SMI needs to sign a loan agreement to be transferred to the new system, with any payments from the old SMI scheme stopping in the near future.

For the income protection task force, which represents providers (including Aviva), reinsurers, advisers and businesses involved in providing income protection services, the removal of SMI is one of the key topics recently discussed.

The change further highlights the need for homeowners to ensure they have adequate savings or income protection in place to cover their mortgage, should they lose their income due to ill health at any point in the future.

The new scheme could mean that those already unable to pay off their mortgage could end up in even more debt, adding the government to their list of creditors.

While the new government loan has a low interest rate (currently under 2 per cent) and is not expected to be repaid immediately, concerns have been raised by a number of individuals and charities, including shadow Secretary of State for Work and Pensions Margaret Greenwood, that it creates additional expense and debt for those already experiencing financial difficulty.

Some critics are referring to the new scheme as a “second mortgage”, alluding to the fact that many financially vulnerable homeowners will effectively be asked to take out a loan to pay off a loan.

Furthermore, the new scheme could mean that those already unable to pay off their mortgage could end up in even more debt, adding the government to their list of creditors.

Rising living costs mean it is already often a struggle to make ends meet or to save for a rainy day. Moreover, there is a widespread expectation that the government and employers are able to provide some degree of financial safety net for those in need.

Though there are still many valuable financial lifelines in place, they should not be relied upon as the only support. For example, there is no guarantee that an applicant would receive SMI for a mortgage or loan they take out.

The fact that many people have little savings, plus the potential difficulty in accessing or repaying benefits, means thousands of people are leaving themselves unprotected from and vulnerable to financial shocks, such as the loss of income or the breakdown of a relationship.

The replacement of SMI benefit with a repayable loan is another significant reminder of the need for individuals to ensure they have adequate protection in place, to help absorb the impact of these kinds of unplanned future financial shocks.

Advisers have an important role to play in making sure their clients are aware. 

In the event that a homeowner suffers ill health and is unable to work, being able to claim on an income protection insurance policy means financial support to pay and service their mortgage as well as meeting other living costs.

Having this protection in place not only mitigates the need for government support and an additional loan, it can also bring peace of mind. Income protection can cover the whole of a homeowner’s mortgage payment, unlike the new government loan scheme which covers interest only and is repayable.

The recent changes to the SMI scheme means now is an opportune time for financial advisers to undertake a thorough review of clients’ cover to ensure they are adequately protected should they suffer ill health and be unable to work in the future.

While SMI’s replacement may provide a valuable service for UK homeowners, financial advisers could use this shift in policy as an opportunity to make their clients aware that alternative insurance measures should be put in place to protect their incomes, and mortgage payments, over the years ahead.

Mark Cracknell is head of protection distribution at Aviva