Payment Protection Insurance: Cutting Through the Noise
This article cuts through the noise of the recent PPI scandal to explain what PPI is, when it can help, and questions to ask before purchasing. It also summarises the recent controversy regarding mis-sold PPI and describes how to make a claim if you haven’t already.
What is Payment Protection Insurance?
Payment Protection Insurance (PPI for short) is insurance intended to protect you from missing payments on a large loan, credit cards or your home mortgage if you become unable to pay due to illness, loss of job, or another circumstance. PPI is different and separate from income protection insurance. Income protection insurance pays the policyholder money to replace lost income due to illness or job loss. PPI, by contrast, pays the company servicing the loan if you cannot make payments.
PPI is available for any large loan, including home insurance, car insurance, secured personal loans, and credit card debt. You can buy general PPI policies, or you can buy a policy fit to a specific risk – examples include credit life insurance, credit accident insurance and credit disability insurance. There are a number of factors to consider before purchasing PPI, which are discussed on the FSA website.
PPI policies will usually make minimum payments on the covered loan for a specified period of time, normally 12 months, after which time the policyholder must find another way to make debt payments.
Before making any financial decision it’s important to do your research. If you were looking for a new credit card, for example, you might choose a comparison engine to ensure you can research all of your options. Similarly, it’s important to investigate PPI and consider whether you really need it, as a standalone policy might be more cost effective.
The recent PPI controversy
PPI has been widely mis-sold so there has been a lot of negative publicity surrounding it. Some consumers claimed they were unaware they had a PPI policy, others were sold it when they did not need it or would not be able to claim under the policy.
The Guardian reported that approximately 34 million policies were sold since 2001. The largest PPI sellers set aside almost £14 billion to pay claims submitted by consumers.
According to the Financial Conduct Authority (FCA), the banking industry has paid back over £10.1 billion to consumers who filed complaints. Monthly PPI claim payouts skyrocketed from £66.4 million in June 2011 to £244.5 million in August 2011 to £535.5 million in December 2011. PPI claim payouts have stayed above £400 million per month every month since, with the single exception of March 2013.
The PPI claims controversy does not mean that PPI insurance is not a helpful type of cover to have. As with any consumer purchase, it is important to carefully analyse the type of PPI cover being offered and compare it with your specific circumstances and risks to financial stability. For example, if you’re self-employed or looking to go self-employed, you might find that you’re not covered by PPI insurance.
Buying PPI cover in 2014
If you are considering purchasing new PPI cover, here are some important issues to consider:
- PPI policies do not cover loan payments for the first 90 days the policyholder is unable to work.
- Check the list of covered illnesses carefully – many are not covered.
- PPI does not cover inability to earn income due to an existing medical condition that you already knew about when you bought the PPI policy.
- If your employer provides long-term sick pay, consider whether this will be enough to ensure payments without buying PPI.
- If your debt greatly outweighs your savings, PPI might be a good bet, especially for key loans like your home mortgage and car loan.
- Read the policy carefully and ask for more information about anything you do not understand.
To help you decide whether PPI is a cost-effective purchase for you and your family, here are some examples of premium costs. This example, compiled by the Money Advice Service in August 2012, is based on a 40-year-old employee who wants coverage for an accident, sickness or unemployment.
Monthly loan repayment
Protection to run for
Waiting time before policy pays out
Maximum number of payments per claim
Approximate monthly premium
|£100||5 years||91 days||12||£4.92|
|£100||5 years||15 days||24||£10.92|
In addition to PPI, you may also want to consider income protection insurance or short-term income protection insurance, which is a new product developed in part as a response to the PPI controversy.
How to submit claims
If you have not yet submitted a claim regarding mis-sold PPI and wish to do so, you should submit your claim directly to the bank or other financial institution that sold you the cover. If you do not reach a satisfactory conclusion, you should contact the Financial Ombudsman Service to make a complaint.
Never go to a claims management company to file your claim. These organisations will charge you a fee in advance or will take a percentage of the compensation you receive. There has been a lot of negative reviews of companies like this in the press (see this news article).