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Have you got the unthinkable covered?

The thrill of moving into a bigger, better or more beautiful home can mask the possibility of falling sick, having an accident or losing your job and being unable to meet your monthly mortgage payments. Though most lenders urge borrowers to take out insurance cover for such unseen or unfortunate events, only 20 to 30 per cent take it up. So, to make the idea of ASU (Accident, Sickness and Unemployment) cover more attractive, some lenders offer it with free premiums for the first six to 12 months.

"The idea is that after having the benefit of free cover for a period, borrowers will be more likely to keep the insurance on for the rest of their mortgage," says Dave Smith, of PWS Partnership. ASU, like any other insurance policy, is a form of protection. By paying a monthly sum which varies from about £20 to £60, you can safeguard your mortgage payments for periods of one to two years. Like state benefit claims, the average waiting period for payment is 30-60 days, which is usually backdated, though some of the more expensive policies pay up on day one.

The number of borrowers taking out ASU rose from just over 20 per cent in 1999 to 36 per cent in the second half of 2001. "Public confidence is slowly coming back after it was hit by less reputable companies who charged large premiums, argued over the small print in their contracts and failed to pay out on many of their claims," says Smith.

In the early Nineties the industry was also tarnished by brokers who used ASU, or mortgage payment protection insurance, to extract hefty commissions from unsuspecting borrowers who took it out as an add-on to their already sizeable mortgage payments.

Two years ago, the Council of Mortgage Lenders and the Association of British Insurers laid down strict guidelines for ASU providers. In its report, it estimated 55 per cent of new lenders would need ASU cover by 2004. So who needs ASU? Quite simply, anyone who does not have enough savings or insurance to carry them through a critical period. Naturally, circumstances differ from individual to individual.

A self-employed printer will need accident and sickness protection but not unemployment cover unless he is made bankrupt or falls into dire straits, while employees who belong to an established health scheme such as teachers, civil servants or fire service workers may need little or no sickness or accident cover for their mortgage. And since the rules were tightened, almost all lenders and ASU providers offer either one or two cover options as well as the full package.

Ian McCarthy, a Maidenhead-based IFA, says a prime "unemployment" ASU candidate would be someone who lives in an area with few employment prospects or else has job skills that are not easily transferable. Dot-com and IT employees, who usually find it easier to switch jobs, often do not need it. "People should study the different options and see what applies to them when they take out a mortgage. They can usually reduce their premiums by separating the sickness or accident cover from the redundancy option," he says.

Like the fast-track mortgage market, you can switch your cover mid-term if you come across a better offer. But as Ray Boulger, of mortgage brokers John Charcol, says: "You must be careful, especially with unemployment protection, for you may get caught out and end up with no cover. You will almost certainly have a moratorium period of three to six months with your current company before you can switch."