Payment Protection Insurance For Dummies
Unless you don’t read the finance sections of the newspaper, you will no doubt be familiar with payment protection insurance – or PPI for short. Unfortunately, payment protection insurance – which is an umbrella term for income, loan and mortgage payment protection policies – has featured very prominently in the media recently. And all for the wrong reasons.
What does payment protection insurance do?
But first of all, what is payment protection insurance? PPI policies pay out a monthly tax-free sum should you become unable to work due to long term illness, accident or involuntary redundancy. This means that your credit commitments – such as mortgage, loan or credit card repayments – and in some cases depending on which policy you buy, other living expenses, are covered in part or full by the insurance.
This means that you won’t have to worry about paying your debts while you find another job or get back to 100% health – certainly State benefits will not cover the average person’s cost of living – nor will you upset your lender by missing payments (which can also affect your credit report and potentially any future lending). And in the case of mortgage payment protection insurance (MPPI), it can keep a roof over your head, quite literally.
So you can see just why payment protection insurance is such an invaluable product. If sold properly that is. Unfortunately, there has been lots of negative coverage in the press and on the TV recently regarding PPI. Plus, with the referral of the sector to the Competition Commission for an in depth review which is expected to last two years – understandably confidence in the product has taken a nose dive.
There have been reports of consumers being forced into buying expensive and often unsuitable PPI alongside their loan, credit card or mortgage. Many of these consumers have bought it without realising that it is not compulsory, nor that they can shop around for a standalone policy and some without actually realising what the cover is for.
Several large companies have already faced fines for their failings in selling payment protection insurance and some consumers have proven that they were mis-sold a payment protection insurance policy and have successfully been awarded compensation for being sold ‘unsuitable’ policies.
For ‘failings’ this could mean that the product was not properly explained and the correct advice given when the policy was sold. Or, where the seller did not even ask the right questions in order to assess a customer’s suitability for the product.
Some customers even took out loans not realising that PPI cover had been included in the total cost of the loan -and they were paying interest on it!
The term ‘unsuitable’ can cover lots of issues, but probably one of the main ones is exclusions. Many people who were sold PPI already had a pre-existing health complaint that the policy simply would not cover.
Or, they were self-employed. Very few PPI policies are actually suitable for self-employed people due to how they would actually prove they were not receiving an income when it came to claiming. In some cases, the insurers only pay out if you shut the company down!
But don’t let this put you off. If there is a gap in your protection insurance and PPI is the product to fill it, then there are ways to ensure that you don’t get caught out with an unsuitable policy.
Tips on buying PPI
First of all, remember that payment protection insurance is not compulsory and you do not have to buy it alongside your loan, credit card or mortgage. The lender or bank may intimate this – as this is where they make their biggest profits – but you don’t have to go with their product.
Some companies offer cheaper loans if you take out their PPI policy along with it, but while the loan may be cheap, the payment protection insurance certainly won’t, so don’t be fooled!
As with everything, shop around for the right deal for you. Go to an independent, standalone provider who is not ‘tied’ to a particular PPI provider and that way you’ll have more choice.
Check out the policy terms and conditions and see what the policy does and doesn’t cover. As an example, many do not cover time off work for stress or backache – the two most common reasons for absence from work.
See whether your occupation will be covered by the insurance.
Find out what is the highest income amount you are insured for and how long the benefit will be paid for (typically it is 12 months but some policies pay out for up to two years)
Ask whether the payments are likely to increase and if so by how much?
Finally, check out the premium. Premiums from independent providers are normally cheaper than those offered by the high street banks ad lenders. In fact, you can save up to 40% on MPPI and 80% on loan protection insurance if you shop around carefully.
Mis-sold a policy?
If you already have a payment protection insurance policy and feel that you were mis-sold the cover, ask yourself the following questions to see if you have a case:
• told the policy was optional or was it implied that PPI cover was compulsory or that it was compulsory in order to obtain the loan?
• given a statement of Demands & Needs as well as appropriate Financial Services Authority (FSA) documentation at the appropriate time?
• asked about your employment status and whether you had any pre-existing medical conditions?
• allowed to check the policy terms and conditions prior to the sale (either face to face or via online sales)?
• asked whether you had any other insurances in place that already covered the risk?
If you feel that you have been mis-sold your payment protection insurance policy, then contact the lender who originally provided you with the cover and voice your concerns. If you find that then matter is not then satisfactorily resolved, take it up with the consumer body the Financial Ombudsman Service.
Finally, remember that payment protection insurance is literally priceless and can mean the difference between financial recompense and financial ruin should you become unable to work.
Choose your provider wisely and you won’t go far wrong.