A Huge Rip off Ripped Apart!

Buying insurance is incredibly tricky, because you need to look beyond the price. We've uncovered massive differences between apparently similar policies.

In How You Could Lose Your Home, I wrote about the main reasons behind mortgage arrears and repossessions -- when homeowners lose the roof over their heads because they can't meet their mortgage repayments.For the record, the four main causes of mortgage arrears are: reduced income (31%), financial mismanagement (22%), unemployment (12%) and ill-health (12%). The first two problems, which account for more than half (53%) of all cases of mortgage arrears, cannot be described as insurable events, so no insurance company would be prepared to pay out in these circumstances. (After all, if we could spend willy-nilly and then let an insurer pick up the tab, we'd all be doing it!)However, you can insure yourself against unexpected events, such as accidents, sickness or unemployment (ASU). Indeed, sales of payment protection insurance (PPI) are booming: there are between twenty and twenty-five million ASU or similar policies in existence in the UK, protecting the repayments on our credit and store cards, car and personal loans, overdrafts and mortgages.Today, I'm going to show you how seemingly similar mortgage payment protection insurance (MPPI) policies are, in fact, very different below the surface when it comes to paying benefits to claimants!According to the latest figures from trade association the Council of Mortgage Lenders (CML), at the end of 2005, 2.45 million mortgages were covered by MPPI. As there are 11.6 million mortgages in the UK, this means that around one in five homeowners (21%) enjoys the peace of mind which MPPI provides.Aha, but just how much of the fabled peace of mind do these policies provide? The big problem is that two policies charging similar premiums can pay very different benefits. To prove this, I checked the payouts of MPPI policies sold by the UK's 28 largest mortgage lenders, which account for 19 out of 20 mortgages (95%). Here's what I found:How long do I have to be off work before I'm paid a full monthly mortgage repayment?LenderWaiting period for firstfull paymentKensington Mortgages30 daysAbbey58 daysAlliance & LeicesterBradford & BingleyBristol & WestChelsea BSCheshire BSCo-operative BankCoventry BSHalifaxHSBCLeeds BSNational Australia Bank/Yorkshire BankNationwide BS60 daysSkipton BS86 daysBarclays/WoolwichBritannia BSDerbyshire BSGMAC-RFCLloyds TSB/Chelt & Glouc.Northern RockParagonPortman BSPrincipality BSStandard Life BankRoyal Bank of Scotland/NatWestWest Bromwich BSYorkshire BS90 daysThe monthly premiums for these policies are broadly similar: all but a few charge between 5% and 6% of your monthly mortgage repayment, so a £500-a-month repayment would cost roughly £25 to £30 to protect.However, if you're off work for thirty days due to accident, sickness or unemployment, you get a full monthly repayment from Kensington Mortgages, which is known as back to day one cover. Alas, with every other policy, you'd get nothing. Extend your absence from work to sixty days and half of the policies (14 out of 28) would pay a full monthly benefit. Be off work for a full three months and every policy will pay a full monthly benefit, which is known as the MPPI Baseline.So, before buying an MPPI policy, be sure to ask how long you'd have to be off work before benefits start to pay out. In many cases, you'll get nothing for absences lasting up to sixty days (known as a "60-day excess period"), followed by a benefit which accrues daily and is paid monthly.Finally, whatever you do, don't buy MPPI from your lender. The average monthly cost of the above policies is about 5½% of your mortgage repayment, but about three-quarters of this is pure profit. Indeed, a not-for-profit MPPI policy sold by the tiny-but-caring Market Harborough BS (MHBS) costs just 3%, which is half the cost of the policies sold by its gigantic rivals. So, that's five stars out of five to MHBS, but no stars for the big mortgage lenders!More: Find cheaper mortgages and great deals on insurance via the Fool!Cliff owns shares in Lloyds TSB and HBOS, parent company of the Halifax.