Payment Protection – What’s All The Fuss?

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You’ll have noticed a lot of commentary in the UK media over the problems with Payment Protection Insurance. We believe the problem isn’t so much what insurance does but how it’s sold.

Payment Protection Insurance protects borrowers from being unable to pay their debts due to income loss, illness, or accident. Although the basic concept of insurance is sound, it is difficult to prove a claim. You won’t be eligible to claim if you aren’t able to work or if your back pain was the result of your injury. Only 4% of policyholders file a claim, and one in six claims is rejected.

The worst part is that some people have been pushed by lenders to buy Payment Protection Insurance. This could be because their employer will continue paying them if they are ill, or because they have other types insurance that offer similar benefits. Or because the nature of their job would make it impossible for them to claim. According to Defaqto, the financial researcher, 66% of online credit card companies, and 30% of loan providers, fail to disclose the terms and conditions of the insurance before you sign up. These terms and conditions will tell you if you can claim.

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FSA’s Mystery Shopper Investigation into Payment Protection Insurance was published a few months back. The investigation found that nearly half of the lenders who shopped failed the customers to fully explain the exclusions and ensure that the insurance was appropriate for them. Although the investigation did not conclude that lenders were selling PPI compulsorily, it did reveal that it was often added to loan quotes without explaining that it was optional.

We find it even more concerning that many lenders don’t disclose the total cost of insurance. Many times, the total cost of insurance (for the entire loan period) was added to the loan as an upfront lump sum rather than being paid monthly as a premium. The borrower can’t cancel insurance coverage without repaying the entire loan. Interest is also charged on the premium.

After months of debate, the Financial Services Authority has finally shown its teeth. It has informed Banks, Building Societies, and other lenders that they may be required to stop selling Payment Protection Insurance along with loans and mortgages if their acts are not cleaned up.

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The FSA threatened to take “corrective action” if Payment Protection Insurance is not sold as intended in a confidential letter that was sent to the Council of Mortgage Lenders. This information was leaked to National Press. Further, the memo states that the FSA would prefer lenders to get their act together, but if that is not possible, it threatens to take action. Most likely, the FSA would direct that PPI sales must be done separately from the sale of a loan or credit facility. Lender profits will be affected by this directive as they made over PS1 BILLION in payments protection insurance profits last year.

Lenders have improved their ability to charge PPI over the years. A few months back, we found a bank on the high street that charged PS5,150 to cover a loan amount of PS16,000. The cost of insurance was added to the loan, bringing the total amount borrowed up to PS21.150. The insurance cost was added to the monthly payment of PS300. This resulted in a PS70 repayment. The lender did not tell the borrower that similar insurance could be purchased on the internet for approximately PS20 per month. Also, the insurance online was cancellable at anytime without penalty.

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Simon Burgess (Managing Director of British Insurance Ltd) stated that the average cost of a loan insured by big banks is PS30. If the policy is purchased separately online, this compares to between PS4 & PS6. This price comparison view is broadly supported by uSwitch, the price comparison service. It states that taking out PPI with banks may increase the insurance cost by almost 500%.

Is PPI a good idea? And how can you buy it the best?

If you are concerned about your ability to pay your mortgage or other debts if you are unable to work because of illness, accident, or unemployment, PPI might be a good option. You need to do some research first.

What is the maximum amount your employer will pay you if you are ill? Is it at your full salary? You might not require insurance if they are generous.

Are you covered by any other insurance?

You can then search the Internet for “payment insurance”. It’s almost certain that you will find it there at the cheapest price.

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For competitive premiums, always shop on the Internet.

Choose a policy that has a monthly premium.

Before you purchase online, make sure to read the policies’ conditions. You should also check the conditions to see if you can backdate the claim to the day you last worked. You should also review the conditions that you are allowed to file a claim. Is it possible to claim because of the nature of your job? Don’t buy if this is the case.

PPI is a good idea. But don’t rush to make a decision. You should ensure that the coverage is appropriate for you and that it’s a good value. You won’t regret following our advice. Then you can sleep peacefully at night.