It insures the repayments on most kinds of borrowing; including mortgages, credit cards, personal or secured loans or hire purchase agreements. However, PPI will only pay out if you cannot meet these repayments through no fault of your own - for example, if you lose your job or have to stop work as a result of an accident or illness.
In such events, PPI will pay out the level of cover arranged, typically for up to a year. Some policies, but not many, also include life cover so will also promise to repay your entire outstanding loan if you die before it is paid off. According to market analyst Datamonitor PPI policies were worth £5.4 billion to the financial services industry in 2006 (Source: The Guardian, 15/08/2007).
The world of finance is littered with acronyms and it can become confusing when there are two that are similar. MPPI (Mortgage Payment Protection Insurance) comes under the PPI umbrella although it is classed as a separate product.
True to its name, MPPI will pay out if you cannot meet your mortgage repayments as a result of being unable to work. MPPI will pay out for a given time period - usually 12 months although some products extend to 24 months. State help is sometimes available if you cannot pay your mortgage after nine months - although it is restricted to the interest on the first £100,000 of the loan.
Although MPPI has come under criticism in the past, it is largely exempt from the problems identified around PPI in 2006. This is because, as MPPI is sold with mortgages, the process is more thorough and independent financial advice more commonly sought. Applying for a loan or credit card by contrast may be carried out quickly and without consultation
How do I buy Payment Protection Insurance?
This is the million dollar question. Currently, you may take PPI direct from your loan or credit card provider or shop around for a standalone product from a separate company. But according to an investigation into the PPI industry by the Office of Fair Trading (OFT) in April 2006, consumers are unaware they have this choice. This is just one of several problems the OFT found with PPI. The OFT subsequently referred the whole industry to the Competition Commission, which is due to publish its final report in November / December 2008. You can follow the progress of the Commission's investigation on the Payment Protection Insurance inquiry website.
One of the Office of Fair Trading's main concerns is how PPI is sold - which is typically by the lender at the same time as the credit arrangement is put in place. This means that customers are often unaware they have a choice of PPI products. In turn, they do not shop around for the best deal in the same way they might with a mortgage or even the form of credit they are taking - a personal loan for example.
What's more, sales tactics in respect of PPI have been found to pressurise customers into taking the product when they may not need it. And salespeople - who can also source generous commissions from selling the product - have been found to imply that the customer can only qualify for the loan if they take the PPI or that it's the only product available. But PPI is not compulsory and there is a growing market of providers for borrowers to choose from.
What kinds of PPI are available?
The way PPI is charged will depend on the type of credit you want covered and where you buy it from. If the borrowing constitutes 'continuous credit', such as credit cards, mail order or overdrafts, PPI will be charged on a monthly basis.
If the credit is for a fixed term, such as a personal loan or a hire purchase agreement, it may be charged as a 'single premium'. As its name suggests, single premium PPI is paid in one go and upfront. The lender calculates what you owe on the insurance over the whole term of the loan - five years for example - and this sum is then added onto what you are borrowing.
As interest is incurred on the cost of the PPI as well as the loan, single premium PPI can often amount to notoriously bad value. It can add up to £4,500 onto the cost of a £10,000 loan taken over five years (Source: The Sunday Times 05/11/06). In addition, policies often only provide cover for between three and five years anyway. So if your loan runs for longer than this, you will be paying interest for insurance that is no longer effective.
Can I cancel the insurance policy?
If you are paying a monthly premium, you may need to give your insurer some notice if you want to cancel. Then, from the month the premium stops being paid, the insurance becomes null and void. Pay-monthly PPI provides the best value and gives the borrower more control over their finances.
Things are not as straightforward with single premium policies. Theoretically customers should be able to cancel the premium and receive a refund to their credit balance. However, there have been reports of borrowers having problems with this approach as lenders claim that the entire loan must be re-arranged - and perhaps even at a higher interest rate.
Even if the cancellation process runs smoothly with a single-premium policy, the refund is unlikely to be proportionate to the time left on the policy. This is because of the way PPI providers calculate the value of cover - it is more expensive early on in the loan as claims would be proportionately more expensive for the provider at that time.
Many consumers don't know it but, by law, they have the right to cancel any Payment Protection Insurance policy within the first 14 days of accepting it (or 30 days if life cover is included). In this case a full refund of the cost of the PPI must be made - but expect some small administration charges to be deducted first.
What doesn't PPI cover?
Payment Protection Insurance can be riddled with exclusions making it very difficult for people to claim. For example, if your problem is related to a back injury or stress, the insurer may not cough up. Pre-existing medical conditions may also be excluded. Self-employed or contract workers whose income fluctuates may find, after signing up, that they do not qualify for PPI at all.
Be warned also that most PPI policies incorporate a deferment period - typically 30 days. This means that even if your claim is successful, you will have to find the first month's debt repayment from your own purse. Most PPI policies will become null and void once you have claimed - thus a second claim will not succeed.
Do I really need Payment Protection Insurance?
It is sensible to ensure your mortgage payments are covered should you lose your income. However, think carefully about the minimum repayment/s - which is all that is required should things get tight - on unsecured borrowing. Is it possible to borrow this sum from friends and family for a month or two while you look for work? If so you could save yourself a fortune. Also bear in mind that even if you do take PPI, you will most likely face a deferment period of 30 days so you'll have to find at least this much anyway.
If you do decide to opt for the peace of mind that PPI can offer, don't just take the first product you come across. If you are being pressured by a loan or credit card provider, simply tell them you will take your business elsewhere.
There are several stand-alone PPI products available, priced from around £2.75 per £100 of cover upwards. Some of these policies may be used against any form of borrowing and will cover typical PPI exclusions such as stress-related leave from work. Others allow you to make a claim and continue the policy thereafter.
What should I do if I am unhappy with my PPI?
If you are unhappy with your Payment Protection Insurance, you should first complain to the provider. If you are unsatisfied with the response, you may take your complaint to the Financial Ombudsman Service although, unless you were sold the product by an adviser and it was deemed inappropriate, receiving compensation could be unlikely.
Currently PPI is a real money-spinner for lenders who are accused of using the products to recoup profits lost on more competitive products such as mortgages. But, it has become clear that the Financial Services Authority and Office of Fair Trading are taking a tougher stance on the industry; for consumers, the future can only mean better value.
Source: Moneyextra and The Onion Group
