Payment Protection Insurance (PPI) and Debt

By May 6, 2009Articles

Payment protection insurance, also referred to as PPI, Accident, Sickness and Unemployment cover (ASU), Account cover, or Payment cover, is a form of insurance that covers the cost of monthly repayments on debt such as mortgages, loans, credit cards, storecards, and catalogues if you are unable to work due to illness or accident, or if you lose your job through no fault of your own (ie. you are made redundant).

PPI has had a bad press recently, due to a number of companies misselling expensive cover alongside their products, but in the current economic climate it really pays to have some form of insurance in place, should you be unable to pay your debts due to sickness, accident, or redundancy. Otherwise, you will have to maintain payments whilst your income is compromised and may well find that you cannot do so.

  • PPI provides peace of mind, should you lose your job or be unable to work
  • Payments (or a certain percentage of them) are covered for a specified period of time (usually 12 or 24 months)
  • It is optional – there is usually no obligation to take out PPI with the majority of loans and you should not be pressurised into buying it
  • There are limitations and exclusions in every policy – check these out before you sign up – the most significant ones are normally listed on the policy summary. Most policies specify that you should have been in permanent employment with the same company for at least 12 months, and will not provide cover for those with pre-existing medical conditions.
  • Policies offered alongside a lending product, such as a loan, are often very expensive. It is usually cheaper to buy your PPI online or through an insurance broker. Shop around to find the best deal for your individual circumstances
  • The policy only pays out for 1 or 2 years, meaning you still have to cover payments after this time, whether you are back in work or not.
  • Cover is not always provided for the self-employed
  • Stress is usually not covered under the sickness part of a policy
  • Should you take out PPI and then discover it is not suitable for your needs, you legally have 30 days to cancel the policy and get a full refund of premiums paid

PPI is paid in two ways: in one lump sum (single premium) or by monthly premiums. If you pay in a lump sum, it may be better to try and pay upfront – if this is added onto a loan, interest will become due on it and the total amount to pay will increase considerably.

Shane Craig, M.D. of Paymentcare.co.uk, comments;

“Following a 2 year inquiry into PPI by the Competition Commission, the single premium is to be banned; this is something that Paymentcare.co.uk has long campaigned for. The FSA (Financial Services Authority) recently wrote to everyone currently selling single premium PPI, stating that they should stop selling it as soon as possible and by the 29th May 2009 at the latest.

Furthermore, lenders will no longer be able to sell PPI at the same time as they sell a loan and there has to be a seven day period before the lender can conclude a PPI sale to the customer, unless the customer specifically asks for it (which they will be able to do after a 24 hour “cooling off” period): these changes are proposed to come into effect around October 2010.

This is great news for people who want the peace of mind that PPI can offer, especially in these uncertain times. The golden rule is to shop around and do check policy terms and conditions; don’t just buy on price alone! That said, most policies from stand alone providers like Paymentcare.co.uk will cost significantly less than lenders PPI.

Before taking out PPI, it is a good idea to check whether any other insurance policies you may have will affect the level of cover offered or cancel any aspects of the cover out

The table below shows the cover provided by a typcial PPI policy for the various loans:

Mortgage

Credit/Storecards

Loans

Monthly repayments are met for a set period of time, usually 12 or 24 months*

Either a percentage of the balance (usually 5%) or the minimum payment is made for up to a year*

Monthly repayments are met for a set amount of time, usually 12 or 24 months*.

If life cover is incorporated into the PPI, then the balance of the above debts should be paid off in full if you die.

When shopping around for a PPI policy, make sure you know exactly how much it is going to cost, whether you are buying it alongside a loan or separately. If you are unsure about anything, such as the terms and conditions of a policy, do not be afraid to ask questions – after all, it is important that any policy you take out fully meets your needs.

Finally, if you believe you have been missold a PPI policy that you neither wanted or needed, you may be able to claim back money paid out on premiums. Firstly, raise the issue with the company who supplied the insurance -if you get nowhere with them, put in a complaint to the Financial Ombudsman Service.