Shortfall on mortgage protection policy payout due to accrued interest during claims processing

Hi,

Does anybody have experience or knowledge of the following situation:

Guaranteed Mortgage Protection Plan in place with Zurich.

Claim due to death of policyholder was lodged in January and settled in November, 10 months later. Settlement amount was for the value of the property mortgage on the date of death.

During those 10 months the mortgage lender continued to charge interest on the outstanding balance leading to a shortfall between the payout from Zurich and the amount due on the mortgage in November.

Is this correct? It implies that the estate of the deceased is liable for the interest shortfall between when the claim was lodged and paid.

Should the lender have paused interest charges while the case was being settled? Or should the life company have actually settled for the amount outstanding when the claim was processed?

I don't know what is right or wrong here but for this very reason I over insured for the value of my mortgage and extended the term by 2 years.

First of all, the mortgage protection policy and the mortgage are separate.

Under the mortgage, interest will be charged until the loan is cleared.



I assumed that a mortgage protection policy had a specific financial amount which would be covered in the event of death.
In most cases, it's a reducing balance.
So when the policyholder died, this amount became payable.


Brendan

It takes time to settle insurance claims.

It would be unusual to pay interest on the amount of the settlement.

So if my house is damaged by a flood and I claim €20,000 and it takes 6 months to assess and settle, I would not expect interest on the €20,000.

Likewise, I would not see why interest would be paid on a life insurance settlement.

If there was unacceptable delay by the life insurance company and it was not due to the Executor submitting the proper paperwork, I suppose you could make a claim for further payment.

Brendan

So if my house is damaged by a flood and I claim €20,000 and it takes 6 months to assess and settle, I would not expect interest on the €20,000.

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That's a fair point but in this situation the estate of the deceased is being charged interest during the time that the life company and the mortgage company exchange documents and whatever else is needed before settling the claim. So, the longer it takes them to settle the claim the higher the accrued interest charge will be.

Using round numbers, if the outstanding mortgage at the date of death was €100k, then there is almost €5k of interest accrued in the 11 months while the claim is being processed. As it stands, the estate of the deceased seems to be on the hook to pay that.

I might be naive but my understanding was that these mortgage protection policies were purchased to clear all debts relating to the property.

So either the interest should not be charged by the lender while the claim gets settled or else the life company should pay the final amount that is due at the date of settlement.

thumbelina said:

Claim due to death of policyholder was lodged in January and settled in November, 10 months later.

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What was the reason for the delay? Was any of it on the part of the executor?

I can’t see what could take so long once a death certificate was in existence and supplied to provider.

If the delay was all on the part of the insurance provider have you lodged a complaint seeking compensation? If this is unsuccessful you could go to the FSPO.

I have come across similar in the past when working in bank. Mortgage protection polices and mortgages aren't linked as such for the amount, they are taken out originally for same amount but operate independantly. The policy assumes a level of growth in investment which maintains the policy and it assumes the mortgage will go down in line with the amount taken out and the term.

While I never came across one that did not pay out enough due to any under performance of the policy itself I saw several that did not pay out enough to clear the mortgage for various reasons. Usually due to arrears at some stage on the mortgage which meant the mortgage balance did not go down at the pace it should have. One case was something similar to what you mention and was a delay in issuing the payout, the bank in the finish up wrote off the shortfall as it wasn't that big and there were mitigating circumstances that meant it would be hard to collect. I would see it as perfectly normal that interest would continue to accrue on the mortgage while it is still outstanding.

It would be important to ascertain why there was a delay and if it's on the insurance company side then possibly they should be covering some of the difference, if not and the funds are there to pay the difference then the estate will probably have to. If there is any case to be made for leniency to the lender this should be tried too and they might make a better settlement or gesture to reduce the amount owning.

Dr Strangelove said:

What was the reason for the delay? Was any of it on the part of the executor?

I can’t see what could take so long once a death certificate was in existence and supplied to provider.

If the delay was all on the part of the insurance provider have you lodged a complaint seeking compensation? If this is unsuccessful you could go to the FSPO.

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They don't like paying out plain and simple, and they want to make it as bloody hard as possible as well.

Took 3 months to get the mortgage protection to pay out for my brother in law's death. They didn't want to pay out with an interim death certificate (he died in RTA)

Complaint and solicitors they paid out. Wouldn't do direct settlement either to bank, insisted on going back to premium paying bank account. More misery and paperwork for my sister to negotiate during a difficult time.

I know financial companies have vulnerable customer charters but their needs to be some regulator led framework to try and come up with one set procedure for all companies to work towards. Everyone has different rules!

Sarah Ryan said:

They don't like paying out plain and simple, and they want to make it as bloody hard as possible as well.

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That is nonsense.

If there is a valid claim they will pay out.

They have to do their checks before paying out. Lots of people are trying to defraud insurance companies and banks.

Sarah Ryan said:

Took 3 months to get the mortgage protection to pay out for my brother in law's death.

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That seems reasonable.

It's a large amount of money.

Brendan

Monbretia said:

The policy assumes a level of growth in investment which maintains the policy and it assumes the mortgage will go down in line with the amount taken out and the term.

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Hi Monbretia

This would be for an endowment policy. It is very unlikely to be an endowment policy. And the mortgage would not be going down.

If it were, then there would be no complaint as the value of the insurance policy would probably have risen in the 11 months.

It is much more likely to be a declining sum assured policy where the amount of cover declines in line with the schedule mortgage balance.

Brendan Burgess said:

Hi Monbretia

This would be for an endowment policy. It is very unlikely to be an endowment policy. And the mortgage would not be going down.

If it were, then there would be no complaint as the value of the insurance policy would probably have risen in the 11 months.

It is much more likely to be a declining sum assured policy where the amount of cover declines in line with the schedule mortgage balance.

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To the best of my recollection all policies are assuming a growth rate built into the future cost, after all the company is investing the monthly payments in something or other and expecting to make some money on them, it's part of the business model I imagine. I know about endowments, they were more dependent obviously on the growth as there were no capital payments made on the mortgage but I *think* even the decreasing type basic policies have an inbuilt spread of return. Pretty irrelevant in most cases as they are guaranteed to pay off the outstanding balance if the balance is correct as per amortisation tables, so no arrears or no delay as happened here.

Maybe someone on here that still sell insurance could confirm my recollections.

No, the insurance company insures a set amount, either fixed, or declining over a period of years.

How the insurance company funds that through its own investments is just not relevant to the policy holder.

Brendan

Thanks for the replies everybody, to answer some of the questions / points raised:

* the delay in the processing was between the life company (Zurich) and the lender (Pepper), it took at least 6 months by the looks of it for Pepper to find the deed of assignment for Zurich

* the policy here is not an endowment or anything special, just a regular protection policy that pays out the remaining mortgage balance when the insured person dies.

I accept that the amount paid by the insurance company would be the amount owed at the date of death but when there are delays in case handling between the lender and the life company it seems unfair on the estate to be forced to make interest payments to clear interest arrears.

I know financial companies have vulnerable customer charters but their needs to be some regulator led framework to try and come up with one set procedure for all companies to work towards. Everyone has different rules!

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I don't imagine ours is an unusual case - surely everybody suffers this problem and are forced to make up the shortfall? Or is there a code of practice on the lenders whereby interest payments should be paused until the claim is settled?

Otherwise there is no incentive for the lender to process cases efficiently and in fact it financially benefits them to drag processing out as long as possible so that they can earn maximum interest.

thumbelina said:

Otherwise there is no incentive for the lender to process cases efficiently and in fact it financially benefits them to drag processing out as long as possible so that they can earn maximum interest.

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I don’t really follow this logic. The interest due to the lender comes out of the estate either way. If there is an incentive to delay it is on the part of the insurance provider who has an investment return for longer. But that wasn’t the case here it seems.

Monbretia said:

Pretty irrelevant in most cases as they are guaranteed to pay off the outstanding balance if the balance is correct as per amortisation tables,

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My policy declines by a straight 3% a year, which is more conservative than my mortgage amortisation schedule.

thumbelina said:

it took at least 6 months by the looks of it for Pepper to find the deed of assignment for Zurich

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Have you made a complaint to the lender? Have you exhausted any appeal? If so, you can complain to the FSPO.

thumbelina said:

* the delay in the processing was between the life company (Zurich) and the lender (Pepper), it took at least 6 months by the looks of it for Pepper to find the deed of assignment for Zurich

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I think that you have a case under the circumstances as the delay appears to be by Pepper. And they were the main beneficiaries of the interest charged as a result of the delay.

Write a letter to Pepper and ask for a refund of the interest from say 2 weeks after the ball was in their court.

If they refuse, go to the Ombudsman.

Or, if they blame Zurich, take it up with Zurich.

Brendan

Monbretia said:

To the best of my recollection all policies are assuming a growth rate built into the future cost, after all the company is investing the monthly payments in something or other and expecting to make some money on them, it's part of the business model I imagine. I know about endowments, they were more dependent obviously on the growth as there were no capital payments made on the mortgage but I *think* even the decreasing type basic policies have an inbuilt spread of return. Pretty irrelevant in most cases as they are guaranteed to pay off the outstanding balance if the balance is correct as per amortisation tables, so no arrears or no delay as happened here.

Maybe someone on here that still sell insurance could confirm my recollections.

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I think what you mean is the policy assumes a future interest rate on the mortgage, e.g. 6%, 9%, 12%.

The benefit decreases in line with a loan amortisation schedule at that interest rate. So if your actual interest rate stays below the assumed rate (and you meet your repayments) there will always be enough to pay the bank to clear the balance, and there may be a surplus paid to the policyholder.

So you are correct that after day one the schedule is independent from the actual balance on the mortgage, which is why deficits can occur.

An interesting case in today's Irish Times


The policy holder was diagnosed with terminal cancer and the insurance company, Royal London, agreed to pay out within "a matter of weeks".

“It took six months for PTSB and Pepper [who were administering their mortgage on behalf of PTSB] to locate the deed of assignment so that our mortgage could be cleared,” Maeve told Pricewatch.

The mortgage was originally an Ulster Bank mortgage.

ptsb has refunded the interest but the policy holder feels that they have spent 6 months in financial difficulty during the woman's final few months of her life. Had the mortgage been cleared, the husband could have take out a less stressful job so he had time to spend with his wife. (Not sure of that. He could have just stopped paying the mortgage knowing that it would be eventually cleared.)

Brendan

Thanks Brendan - that is a very interesting article, apparently ours was also held up at the stage where they were trying to locate the deed of assignment. I'd be very surprised if this was not the default scenario for unfortunate Pepper customers and many people are paying extra interest without really thinking about it.

My letter of compliant is underway and I'll post an update here if we get a resolution.