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Payment Protection Insurance – The Facts You Need To Know
Payment Protection Insurance cover is a type of cover that is offered with finance such as credit cards, store cards, and loans. Like other types of insurance cover Payment Protection Insurance, or PPI as it is simply known, is designed to provide financial protection under certain circumstances. When you take out finance you may do so under the assumption that you will be able to keep up with repayments throughout the term of the finance. However, this is not always the case, as life does tend to throw a few surprises our way, and this is where PPI can kick in.
PPI is designed to cover your finance repayments for a specified period in the event that you are unable to work and make your repayments due to sickness, accident, or redundancy. The terms and conditions, including the restrictions and exclusions, with this type of policy can be strict, and therefore you do need to carefully check the small print to ensure that the policy is suited to your needs. Not everyone will benefit from PPI – for example, this type of insurance covers your repayments in the event of redundancy, but this is something that you cannot benefit from if you are self employed.
The cost of PPI can be high, but at the same time this form of cover can offer valuable peace of mind, so it can be difficult to decide what to do. Those that do not want the expense of PPI should remember that this is not a compulsory form of cover and there is no obligation to take any PPI cover out at all. For those that do want this protection but don’t want to pay a fortune, it is worth remembering that you are not obligated to take your cover from any particular provider, and therefore you may be able to save money on the cost of cover by shopping around and comparing different PPI plans from a number of providers.
Whether or not you take out PPI with your finance is entirely your choice, although some lenders may make it sound as though this cover is necessary and even make it sound as though taking out PPI will increase your chances of getting finance – this is not the case. PPI, like other types of insurance, provides optional protection to consumers for a price, and you need to weight up the pros and cons before you make a commitment. You should also make sure that you check any policy that you are thinking of taking out carefully to ensure that the cover is suited to your needs and circumstances, otherwise you could end up wasting a large amount of money on insurance that you can never benefit from.
Some insurers however to offer protection schemes specifically designed for self-employed people so they are not paying for benefits which they would not benefit from.
Loan cover watch out for Payment Protection Sharks
The Financial Services Authority (FSA) has been investigating the way Payment Protection Insurance is being sold by loan providers which include some of the UK’s biggest banks and building societies. And it’s big business. Sales of PPI as it’s called, earn lenders more than £1billion a year.
PPI is designed to protect borrowers by paying monthly loan repayment in the event that the borrower becomes unemployed or unable to work though accident or illness. Many lenders sell the insurance alongside the loan with around 50% of customers agreeing to the insurance.
However, according to the Department of Trade & Industry, only 4% claim and of these claims 25% are rejected. This may be partially explained by the FSA’s investigation which found that around half of the lenders surveyed failed to explain the details and exclusions to customers or make sure the insurance was suitable for the clients. Whilst the investigation reportedly does not find that lenders are compulsorily selling the insurance, it was frequently automatically added to loan quotations without it being disclosed that the insurance was, in fact, optional.
Even worse, some lenders are failing to point out to borrowers that the cost of the insurance for the full period of the loan, was being added as a lump sum at the outset rather than being paid as a monthly premium. This means that the borrower cannot cancel the insurance without redeeming the entire loan and renegotiating a new loan.
And hey, some of these lenders certainly know how to charge for PPI. According to Simon Burgess, Managing Director of British Insurance Ltd, one of the big high street banks typically charge £30 per £100 of loan insured. This, he says, compares with between £4 and £6 if bought separately on the internet. This view is supported by price comparison service uSwitch which says taking out PPI with banks can increase the amount you pay for cover by nearly 500%.
Take an example. Last year a high street bank was charging £5,150 for PPI to cover a loan of £16,000. The cost of PPI was then added to the loan making £21,150 as the total capital repayable and interest charged on the lot. This meant that of the £300 monthly repayment, about £70 represented the cost of the insurance. Equivalent insurance can be bought on the Internet for around £20 per month and cancellable at any time without penalty.
So what are the lessons?
If your lender offers you PPI cover ask for the monthly premium with and without PPI. That way you can see the true cost of PPI.
Find out whether PPI is added to the loan as an initial lump sum. If it is back off!
Shop around for competitive quotes. A search on the Internet for Payment Protection Insurance or Income Protection Insurance will find you lots of web sites to try.
Check out the conditions on the insurance. Particularly check out the exclusions which invalidate a claim. For example, some policies stipulate that you must have been working continuously for 6 months prior to a claim for a minimum of 20 hours a week. Seasonal or temporary work is usually excluded. When you take the insurance out you must be in good health and know of no impending disability and not be aware that you could become unemployed. Could these exclusions apply to you? If so, the insurance will be of no use to you.
Please don’t waste your money. PPI insurance is a good idea so long as it is cheap and on a monthly cancellable contract. After all your circumstances may change. Then check the policy’s exclusions to make sure that the insurance is valid for your personal circumstances.