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Payment protection insurance

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Payment protection insurance can cover your monthly loan repayments if you no longer receive a salary due to accident, sickness or unemployment, for a fixed period of time.

What it does?

Payment protection insurance (PPI) will pay out a sum of money to help cover your monthly repayments on mortgages, loans, credit/store cards or catalogue shopping payments if you make a claim. This could be because you have an accident or sickness, or become unemployed through no fault of your own, or if you die.

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 make a claim. It is sometimes known as ASU (accident, sickness and unemployment) insurance, Account Cover or Payment Cover.

PPI is not the only product designed to protect against loss of income, and may not always be the most appropriate. Although PPI can provide worthwhile cover against unexpected changes in your personal circumstances, you should bear in mind its limitations and exclusions, and possible alternative products (such as income protection).

How it covers you?

This 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 – it 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.
  • Credit and store cards – it generally pays 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. The insurance typically only provides cover for the amount you owe when you make a claim, and not any balance you build up after this.
  • Loans – it covers 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.

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.

You should read the key policy information that come with any policy you take out. This sets out, amongst other things, the main features and benefits of the policy as well as any significant or unusual exclusions and how long the cover lasts. If unclear ask the salesperson to go through it with you and make sure you’re happy before you take it out.

The main features

All policies are different, so always shop around and double check with the provider selling the product whether it includes the features you need it to. PPI is almost always optional – you should not normally be refused a loan if you decide not to buy it. If in doubt, ask your provider whether it is optional.

PPI only pays out for a set period of time, usually 12 months.

Many policies will not pay out for the first couple of months after you have made a claim and some may not backdate any payments. This may mean you need to consider how to cover these repayments before the policy starts paying them.

To claim on the unemployment part of the policy typically you must have been employed continuously by the same company for the last 12 months on a permanent contract.

The policy may not cover you if you are self-employed, so make sure you check.

You may not be able to make a claim for an illness you already have or have had before. Make sure you check this before you take out the policy. This will be called a pre-existing medical condition and can include any medical conditions you have, even if they haven’t troubled you for a while.
Stress or back complaints, and possibly other conditions, may not be covered, even if you can’t work because of them. Again, it’s worth checking before you take out the policy.

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Before you take out cover, the firm should give you a Policy Summary. This should set out the key features and benefits, as well as any significant or unusual exclusions or limitations. If you have any queries about these, you should ask the salesperson to explain the cover in more detail. This will help you make an informed decision on whether to take out cover. For example one of the significant limitations in some policies is the ability of firms to increase the amount of premium payable and reduce the amount of cover by giving you notice.

Like all insurance, PPI policies will generally include a number of exclusions or conditions that will prevent you from claiming on the policy, for example if you are employed on a temporary or contract basis or you are aware you may become unemployed. 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:

  • are under 18 or over 65;
  • do not reside in the UK; or
  • work less than 16 hours a week.

If in any doubt, ask the salesperson to explain any parts of the policy that you may not be able to claim on (the exclusions and eligibility conditions). Be sure you understand the exclusions before you buy the insurance.

When to buy it

You’re likely to be offered PPI by the company when you take out a mortgage or other loan or credit agreement, but you don’t have to buy it from them. You can:

buy it yourself separately from insurance brokers, including over the internet;
shop around to get the best deal for you; and
compare the features and costs of PPI products using our impartial comparison tables.
PPI is useful, but you may not always want it or be able to claim on it when you need to.

Costs

Remember, interest rates and APRs for loans, mortgages and credit/store cards do not usually include the cost of the PPI policy, so comparing interest rates on their own will not be helpful if you are taking out PPI.

crowdfundingplace-property-investmentsThe salesperson must tell you how much the insurance will cost you separately from the cost of the loan, over the life of the policy. They must also tell you whether buying the policy is compulsory. You can pay by a single upfront premium, or regular monthly premiums. The single premium can be added to your loan, thereby increasing what you borrow. A regular premium is a set amount you pay each month – tells us P. Lajszczak from Crowdfunding Place (www.crowdfundingplace.co.uk).

The salesperson should quote you a monthly figure for the PPI and the total premium for the lifetime of the policy, whether they’re quoting for a single or regular premium. If you take out a single premium bear in mind that, as it’s normally added to your loan, you’re being charged interest on that as well. A regular premium may be cheaper because you will not be charged interest. If in doubt, ask the salesperson to clarify what sort of premium they are quoting for.

Key things to think about

Think carefully about the risks you could face while paying back a loan, mortgage or credit/store card and whether taking out PPI or another product (such as income protection) would be to your advantage. If you had an accident that stopped you from working, would you have enough money from other sources to be able to continue paying off the loan?

Consider whether you have other insurance which already covers you (such as sick pay or death-in-service benefit through your employer), or whether other types of protection insurance may be more appropriate.

Don’t be pressured into buying it. It is very rare that you have to take out PPI to get a loan and you definitely don’t have to buy it from the same place you get your loan from.

Check the total amount of benefit you may receive from the policy, compared to the cost of the cover over the duration of the loan. This may help you decide whether PPI covers what you need it to cover.

Check online forms when applying for loan or credit online. Although many firms have agreed not to do this, PPI may have been selected by default, and you will need to change this option if you don’t want to buy it. You should also print out or keep copies of completed forms in case you need to complain or make a claim in the future. If you bought PPI in this way but didn’t ask for it you should first complain to the firm that sold you the policy, to give them a chance to put things right. If you’re not happy with the outcome you may be able to take the complaint to the Financial Ombudsman Service – see If things go wrong.

Find out whether the firm is giving you advice; if not, consider whether you need advice. Getting advice means that the firm should recommend a PPI or other policy that meets your needs – see Getting help with money decisions.

Find out whether the policy is a single or regular premium. If you buy a single premium policy you pay a lump sum of 3-5 years’ worth of premiums in advance. This amount is added to the sum you borrow and attracts interest, so you’ll be paying more over the long run.

Check if the PPI cover lasts the length of the loan. Some policies do not always last as long as the term of the loan. For example you may have a 25 year loan but the PPI policy may only cover you for the first 5 years. Think about how you will protect repayments after the policy ends, but whilst you are still paying back the loan.

Check if you would have to continue to pay for cover if you take it out at the same time as a loan but you repay the loan early.

Think about what you would do if the claims payments stop (usually after 12 months) and you are still unable to work. How would you pay the rest of your loan?

Check to see what you will be covered for and what won’t be covered – for example any exclusions or limitations relating to the nature of your employment or your medical history.

Check whether payments from a PPI policy would affect the benefits that could be paid from other protection insurance that you already have.

Check what you will get back if you cancel the policy or repay the loan early.

Shop around and compare the features and costs of PPI products using our impartial comparison tables.

Ask the salesperson to explain the terms and conditions of the policy and make sure you read the key policy information – especially the exclusions.

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