PPI guide - payment protection insurance

• Accident sickness and unemployment insurance (ASU)
• Loan protection insurance, when it is used specifically to protect a loan
• Mortgage payment protection insurance (MPPI), when it is used specifically to protect a mortgage.

How does PPI work?

Just like any other kind of insurance, PPI is paid for in the form of a monthly premium, dictated by the number of features included and the competitiveness of the chosen provider. In the event that you cannot work, it will cover your payments for a set period of time – typically 12 months (or occasionally 24).

There are payment protection insurance policies for mortgages, personal loans and credit cards, each priced differently. Be aware that, on average, personal loan PPI costs about three to four times as much as MPPI and about 50% more than credit card PPI.

Banks, loan companies, credit card providers, hire purchase companies and retailers (in conjunction with store cards) all sell payment protection insurance. It has become a very lucrative market but one that has been dogged by complaints and bad publicity.

Negative press for PPI

The Financial Services Authority (FSA) has led a major crackdown on the PPI market after finding some firms guilty of mis-selling policies to individuals who would never have been able to claim because they were unemployed, self-employed or contract workers.

The FSA has fined a number of firms for poor selling practices, but more penalties are expected. The Office of Fair Trading referred the matter to the Competition Commission (CC) after evidence suggested that consumers were getting a poor deal. The CC has brought in a number of remedies to protect consumers in the future.

Do I need PPI?

If you are employed and want to be insured against sickness, accident or unemployment and would have no other means of meeting your loan, credit card or mortgage repayments, it may be suitable. However, it’s important to remember that, in the majority of cases, these payments would only be covered by your insurer for 12 months.

Before purchasing payment protection insurance, check how long your employer would pay your salary for if you were unable to work. Most firms will cover employees for three months but some will cover you for six or even 12 months in the event of a serious long term illness.

If you already have PPI, don’t cancel it just because of the bad publicity it has received. In the current economic climate it could provide useful protection if you were to lose your job, particularly if you are not entitled to receive much redundancy pay from your employer. But shop around to see if you can get better cover or a cheaper premium elsewhere.

Income protection alternatives

Short term income protection

Many creditor insurers now offer short term income protection (STIP) as an alternative to payment protection insurance. STIP can cover you for accident, sickness and unemployment just like PPI, but rather than covering just your loan payments, STIP is set up to cover a percentage of income. This means that if you cannot work, not only are your mortgage or personal loan liabilities covered but also a proportion of your regular living expenses. Like PPI, STIP only pays out for 12 or 24 months. For a more comprehensive income protection solution, you should consider long term income protection

Long term income protection insurance (IP)

PPI and STIP are annually renewable policies that can be cancelled by the insurer at any time by giving notice of their intention to do so. In the event of a claim, it pays out for only 12 or 24 months. Your policy then ceases and if you are still unable to work, you may not be able to service your debts. By contrast, long term income protection insurance (IP) is set up to cover as much as 50% of your income (not just your loan payments) and pays out until you go back to work or when you retire. If, following your return to work, you fall ill again, you can make further claims. However, long term income protection does not cover you against redundancy. For more information on IP and to see if it is indeed a better option for you, take a look at our income protection insurance guide.

PPI advice

• Check if you are eligible to claim under the terms of PPI policies, particularly if you are unemployed, self employed or a temporary or contract worker.
• Consider buying a standalone PPI policy from a reputable insurer rather than simply accepting the policy offered by your lender.
• Check that you are buying appropriate cover (there are different policies for credit cards, mortgages and personal loans).
• Look into buying STIP or IP as an alternative option
• Consider other ways of coping with unemployment or sickness, such as saving money each month.
• Shop around for the most appropriate cover and don’t just choose the cheapest option.