Blog

03/09/18
The Department of Work & Pensions has confirmed that it will exclude insurance pay outs that are designed to cover mortgage payments, when calculating means-tested benefits. Namely since 6 April 2018 those who suffer a loss of income from sickness or other causes can no longer receive state benefits to cover their mortgage interest payments, instead some may be offered a Support for Mortgage Interest Loan (SMIL) in which case DWP will, where possible, put a charge on their property.

In light of these changes the Income Protection Taskforce and the Building Resilient Households Group sought clarification from the DWP about how pay outs from income protection policies will be treated under the new SMI system. The DWP has now clarified the position and the relevant statement from the DWP is as follows:
"If insurance payouts are restricted to the payment of a mortgage – for example if it is paid direct to the lender – then these payouts will be disregarded in full. However, if the claimant has choice over how to spend the payment then only “any portion which the DWP judge to be intended and used for mortgage cover” will be disregarded."

For Universal Credit (UC), the DWP said: “From 6 April 2018 any payments or any payments analogous to payments for mortgage protection should not be taken into account as unearned income in UC.” A similar clarification has also been made for the existing Job Seekers Allowance (JSA), Income Support, and Employment and Support Allowance (ESA) benefits.

In light of this announcement there has been quite a lot of discussion amongst providers, especially whether new products will be necessary to ensure, for example, that payments from an income protection plan (IPP) can be made directly to a mortgage lender. A number of providers of IPPs are considering new product development to cater for this.From the point of view of the DWP and means testing, given what they have said, clearly it is not essential that payments should be made directly to the lender. Therefore in practice it should not make any difference whether payments are made directly or not, although clearly if payments are made directly to the lender it would save the claimant having to prove how they spend the benefits received.

On the other hand if a life office offering an IPP wanted to provide such a facility, they would need to have administrative procedures to deal with making payments to a third party and potentially making two lots of payments in respect of each claim, e.g. where the amount of benefit exceeds the amount of the mortgage. It remains to be seen whether new IPPs appear.

The clarification from DWP is, of course, welcome. It also serves as a reminder of the usefulness of these policies. It doesn’t however do anything to help those who do not have mortgages, i.e. the generation of renters. Surely there cannot be justification in the treatment of these benefits depending on whether they are used for mortgage payments or for rent; in both cases the payments are to provide a home for the individual and their family. Let's hope the DWP will in due course confirm that the renters will benefit from the same treatment as home owners.