Payment Protection Insurance: All You Need to Know
Introduction
Payment Protection Insurance, often abbreviated to "PPI", is insurance cover that, in theory, at least, protects you against accident, illness, redundancy or any other unforeseen circumstance that renders you incapable of meeting your credit commitments. In other words, if you are unable to work for no fault of your own, PPI will cover the cost – or a percentage of the cost – of your monthly repayments on mortgage or other loans, credit cards and other credit agreements for a fixed period of time.. PPI is big business in the UK, with approximately 20 million policies in place in 2006, according to the Office of Fair Trading (OFT), and up to 7.5 million new policies sold each year. The fact remains, however, that – despite an industry profit of £5 billion per annum from PPI – only 20% of the money collected in premiums is paid out in claims. This compares very poorly with all other forms of insurance, and with medical insurance in particular, where 80% of the money collected is paid out in claims.
Payment Protection Insurance Features, Benefits & Considerations
There are many different types of PPI, and the level of cover, terms and conditions, etc. vary from provider to provider. It is important, therefore, to read the "small print" of any PPI policy that you may be offered, to identify not only what is, but also what isn't covered. PPI has been frequently miss sold in the past, so make sure that you are not "railroaded" into accepting an unsuitable policy by an overzealous or unscrupulous salesperson. The bottom line is that you are not required, legally, to take out PPI cover and you will not be refused credit because you refuse PPI, so if you are in any doubt about the suitability of any PPI policy, don't be afraid to ask the provider for further information.
Typically, PPI provides cover for monthly mortgage, or other loan, repayments for a period of 12 or 24 months. Credit or store cards are also covered, typically for a maximum of 12 months, although it may be an agreed percentage of the outstanding balance that is paid off, or just the minimum payment. This can obviously make a big difference to the outstanding balance remaining at the end of, say, a 12-month period, so it should be clear which option is available. Bear in mind that you will still be liable for the outstanding balance when the PPI cover expires, and cover is based on the amount you owe when you make a claim and excludes any borrowing after the date of a claim.
There are several other factors that may affect the suitability of any PPI to your own individual circumstances. You may, for example, be required to pay for PPI cover by a single payment, or by monthly premiums. In the case of a single payment, the cost of PPI cover is typically added to the total amount outstanding, so that pay interest on the loan amount and the insurance premium. Given that the maximum term for a PPI policy is typically 5 years, if the term of your credit agreement is longer than this, you may end up paying interest on your insurance premium long after the insurance cover itself expires.
PPI policies also typically have many exclusions, particularly those related to pre-existing medical conditions. Back conditions, for example, may be excluded completely, regardless of their severity, or you may be required to provide medical evidence – X-rays, etc. – in support of a claim. Mental health conditions, including anxiety, depression and stress, may be similarly excluded – or require evidence from a psychologist or similar mental professional – as may chronic conditions, such as angina. Typically, any pre-existing condition – or anything that can be shown to be directly attributable to that condition – is excluded from PPI cover, and it is not unusual for claimants to discover, at the time of making a claim, that they are not covered at all.
Similarly, anyone who is self-employed or employed on a short-term contract, or as a temporary worker, you may find that any claim for redundancy is rejected.
Anyone considering PPI should first examine their own financial circumstances – including existing insurance cover and savings – and ask themselves how they would cope in a situation where their income was reduced or stopped for whatever reason. Alternatives to PPI include income protection and term assurance – a.k.a. "life cover" – which are available from a range of providers at competitive prices.