Payment protection insurance
Ever wondered how you'll pay the bills if disaster strikes? You could take out insurance to cover certain debts in the event of an accident or unemployment, but is it worth it?
In a nutshell
- When you take out a loan, credit or store card, you're often asked to take out an insurance policy. This is meant to cover the loan or card repayments if you can't afford them yourself because of illness, unemployment or because you have an accident or become disabled.
- Most policies also include a life benefit which will pay off the outstanding balance on a loan or card if you die. This type of insurance is called 'Payment Protection Insurance' (PPI). It can cover repayment of car finance, personal loans, credit and store cards, catalogue debts and mortgages.
- There are plans by the Competition Commission to ban the selling of PPI alongside a loan, but those plans are now being reconsidered.
- You don't have to take out PPI when you take out a loan and if you do want it, you have the right to shop around. .
Do I really need it?
Think carefully before you agree to buy PPI. Here are some questions to consider:
- The cost of the insurance. The cost of PPI can be high, so shop around to get the best deal. The Financial Services Authority (FSA) has produced its own comparison tables.
- Do you really need to take out the insurance? You might already be covered under your life insurance or employer's sick pay scheme, which will cover the loan or credit repayments if your circumstances change.
- Does the insurance policy really meet your needs? Many PPI policies won't cover you in certain circumstances, for example if you're self-employed or have a particular medical condition, such as a back injury or a stress-related claim.
- How long does the policy pay out for? Typically, PPI only covers the loan or credit repayments for 12 months. Also, many policies pay out in blocks of 30 days. This means that if you returned to work after 28 days, you wouldn't get a payment.
- How much cover will you have? Many policies will only pay the minimum amount on credit card debt (such as 2% or 2.5% of the outstanding amount).
- Will you be covered for unemployment? PPI will only cover you for unemployment under very specific circumstances - you normally have to have applied for Jobseeker's Allowance before your insurance claim will be paid.
Other conditions to consider:
- You must normally be in permanent, full-time employment. This usually means you have to work at least 16 hours or more a week.
- If you work full time, but for a number of different employers, you may not be covered. Make sure the insurance company knows the exact details of your working arrangements before you take out PPI.
- Many PPI policies don't cover you if you're on a temporary contract or self-employed. Check the details of a PPI policy before taking it out.
- Some policies won't cover you if you're dismissed from your job or take voluntary redundancy.
- Many PPI policies won't cover you for certain illnesses. For example, policies don't usually cover conditions involving pregnancy, drugs or alcohol. Nor will they provide cover if you fail to disclose any pre-existing conditions.
Cancelling a PPI policy
- You have the right to cancel a PPI policy within 30 days of buying it.
- If you pay monthly premiums for your PPI, you can usually cancel at any time, although you may need to give a period of notice.
- You may also be able to cancel a PPI policy due to mis-selling (see below).
Making a complaint about PPI
If you have problems claiming on a PPI policy, you should first complain to the insurance company. If you aren't satisfied with their response take your complaint to the Financial Ombudsman Service on 0845 080 1800.
Mis-selling
If you're unable to make a claim, this could be because you were sold a policy which was wrong for your circumstances. You may also have been mis-sold if you paid for a PPI policy upfront (when the costs were added to your loan). If so, it's worth complaining to the company which sold you the policy as you may be able to get a refund. For further help, contact your nearest CAB.
Thanks to Citizens Advice Bureau for help with this article.
Written by Matt Whyman
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