What is a PPI?
Payment Protection Insurance (PPI), also referred to as Credit Protection Insurance and Loan Repayment Insurance, is generally speaking, insurance taken out against the repayments of loans, mortgages and credit cards. By paying a fee, if you are unable to work for a period of time due to illness, injury or unemployment, your repayments will be made for you.
PPIs are promoted to offer reassurance and peace of mind to people that are making payments on personal debts. There are a number of PPI policies available, and much like the loan or debt agreement itself, each will offer varying terms and conditions to suit a variety of differing needs.
This type of insurance policy is often typically in the form of a loan or overdraft, and is added to the credit or loan agreement and taken as part of a set monthly repayment. This can make it seem that you are not paying an extra amount of money for insurance, when you are actually paying an inflated interest rate on the extra credit.
A typical policy, for example, will cover your loan repayments for a period of 12 or 18 months. Then, for this length of time, a set payment will be required each month to cover insurance against you losing your job, having an accident or becoming sick.
If any of these three things occurs, leaving you unable to pay your debts, the Payment Protection Insurance policy should kick in and the money will be paid for you. Your policy will give details of the exact conditions that must be met for you to receive financial assistance.
When taking out Payment Protection Insurance, both the lender and borrower would need to consider carefully what would happen should any of these unforeseen circumstances occur. For example, if you are self-employed, policies will differ in terms of offerings, sometimes paying out little more than your premium. Each person that takes out a PPI must carefully assess its suitability for them.
Recently, there have been much-publicised reports of companies including PPIs automatically when providing loan agreements. This is known as ‘mis-selling’, as a PPI is considered an optional extra and should not be a prerequisite when taking out a loan or repaying a debt. This has led to the tarnished name of PPIs and has seen millions of UK residents able to reclaim millions of pounds from mis-sold policies.
With the industry preparing for an upcoming number of PPI claims, estimates of the figure involved have hit as high as £2 billion. Because of this, the Financial Services Authority have called on financial companies to change the way PPIs are sold. This will hopefully lead to a more consumer-friendly process, but only time will tell.
Simon Cole is an expert in debt consultancy who is currently researching websites that offer payment protection insurance including many claims advisory groups.
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