Payment Protection Insurance (PPI)
Payment protection insurance, or PPI, is insurance that will cover monthly repayments on mortgages, loans, credit/store cards or catalogue payments if you have an accident or sickness and are unable to work, or you become unemployed. This means that the insurance company will pay the monthly repayments (or a percentage of them) on your behalf for a fixed period of time if you become unable to work. It is sometimes known as ASU (accident, sickness and unemployment) insurance.
PPI can provide worthwhile cover against unexpected changes in your personal circumstances, but bear in mind its limitations and exclusions. PPI only pays out for a set period of time, generally either 12 or 24 months - although you may be able to make further claims later. You may not be able to make a claim for an illness you already have or have had before. And stress or back complaints, and possibly other conditions may not be covered, even if you can't work because of them.
Consider whether you have other insurance which already covers you, or whether other types of protection insurance may be more appropriate. Would taking out PPI be to your advantage?
What does PPI cover?
What the insurance covers will vary depending on the sort of repayments the policy is designed to protect, and on the terms of the particular policy. The following benefits are typical for different types of PPI cover:
Mortgage - The insurance covers your monthly mortgage repayments for a set period of time. The maximum number of monthly repayments that the insurance company will make is usually 12, but it can sometimes be 24. This means that after this period you will have to pay your monthly mortgage repayments yourself. You can usually make further claims later on but there must be a gap between them.
Credit and store cards - The insurance will generally pay off a percentage of your outstanding balance or the minimum payment each month for up to a year. Check which option is being offered. This means that you may still have to pay any balance left after this time. As with mortgages, you may be able to claim again on the policy after a certain period.
Loans - The insurance will cover your monthly repayments for the loan - generally for 12 or 24 months. After this period you will have to pay your monthly loan repayments yourself. As with mortgages, you may be able to claim again on the policy after a certain period.
If the insurance for any of these products contains life insurance, then the cover will generally pay off the balance of the debt covered if you die. If the claim is for disability, the monthly repayments may be paid to the end of the life of the loan.
What's in the small print?
Like all insurance, PPI policies will generally include a number of exclusions or conditions that will prevent you from claiming on the policy. Make sure you understand which illnesses are not covered. Also, you may not be eligible to take out a policy in the first place - say, if you work less than 16 hours per week or if you're aware you may be made redundant. If in any doubt ask the salesperson to explain the exclusions and eligibility conditions. Be sure you understand the exclusions before you buy the insurance.
Why is payment protection insurance important?
Payment protection is designed to help pay your financial commitments in the case of sickness, accident and unemployment. These circumstances have been proven to cause financial hardship due to a reduction in in come, making it difficult to maintain payments on mortgages, loans and credit cards. Here are just a few reasons why payment protection is important:
- Reduction in State help
- The Prospect of redundancy during uncertain times
- People are borrowing more
- Savings are often insufficient
- Accidents do happen
- Ill-health can be a problem
- Reduction in State help
Do I have to take out PPI and what would happen if I didn't?
If the firm insists on PPI cover to get the loan, you should consider whether you really want to take the loan with that lender.
Think about the cost of the insurance and the benefits that will be paid out if you make a claim on the policy. Check whether payments from a PPI policy would affect the benefits that could be paid from any other protection insurance that you already have.
If you don't take out insurance, think about how you would pay the loan, mortgage or credit/store card payments if you were sick or had an accident and were unable to work or became unemployed.
