What is Payment Protection Insurance?
Payment Protection Insurance, or PPI, is a policy which covers your monthly repayments in the event that you are unable to work due to accident, ill health or unemployment. It is usually taken out when applying for a mortgage, loan or credit card, although policies can be bought separately from insurers and brokers. PPI has received a good deal of bad press over the last few months due to reports of extortionate rates, unfair policy exclusions, and unscrupulous selling practices of credit and loan providers.
Why buy PPI?
The policies work by covering your monthly mortgage, loan or credit card repayments for a fixed period of time (usually 12 or 24 months) if you become ill, have an accident or lose your job. They add a lump sum onto the amount you’ve asked to borrow which means you pay an increased monthly amount.
If you are the principle earner in your household, PPI offers you and your family reassurance and peace of mind against the threat of illness or redundancy. If the future is uncertain and a significant mortgage or loan is being taken out, it may be a responsible move, as long as the repayments are manageable and don’t push you further into debt. Don’t forget that not only will the amount borrowed go up, you will also be paying interest on the policy as well as the loan.
Read all about it
There have been claims of unfair exclusions to PPI policies, so it is important to read your policy documents when you receive them to find out what these exclusions are. You should bear the following in mind before you sign up:
- Some illnesses will not be covered, ask for a list of those which are not.
- The policy will not pay out where you have to stop working due to a pre-existing medical condition.
- The policy will not pay out if you have resigned, taken voluntary redundancy or lost your job due to misconduct.
- You are unlikely to be covered if you work less that 16 hours per week, if you are on benefits, or if you have been working for your employer for less than 6 months.
- You may not be able to claim more than once in a specific time period, even if your circumstances are genuine.
- It is important to check the named policy holder – only this individual may be covered and not the spouse or partner.
- In the majority of cases it is optional, and you will not be refused credit where you decide not to take the policy.
- Think about what other insurance packages you have (critical illness, income protection) which may overlap with PPI, making it unnecessary.
Cancelling your policy
If you have purchased the policy by ‘disatnce’ means, i.e over the phone, by post or via the internet, you will benefit from a 7 day cooling off period, during which time you may cancel your policy without charge. You should always ask the policy provider or your broker about the cancellation procedure, what administrative charges are made and what refund you would expect to receive. If you have opted for a single premium policy, you may get back less than you think. This is because as you will owe more at the start of the period and so the remaining sum will not be in proportion to the remaining period of the policy.
Additionally, it is advisable to know what will happen to the policy should you pay off the associated loan early. In the event of early repayment, you may find you still owe money on the PPI.
No obligation, shop around
PPI is not obligatory, unless the lender makes it clear that is it a condition of the loan. It should not automatically be included in the loan amount unless you are expressly made aware of it, and the decision to grant you credit will not be affected by your decision not to take the policy. Be careful when applying for credit online, as PPI may already be included as a default setting on the online form and you will need to ‘untick the box’ to have it taken off.
If you are considering a policy such as this, you do not have to take the one offered to you by the loan or credit provider. There is a good deal of variation between the various insurance providers, so shop around to find a policy which is best for you.
Making a complaint
If you feel you have been mislead, or the policy has been misdescribed at any point, then you should complain in the first instance to the credit provider or broker who sold you the policy. If you feel dissatisfied by their response, or they have not put matters right to your satisfaction, you can then escalate matters to the Financial Ombudsman – see: