Did you add payment protection insurance to your mortgage, personal loan, or credit card application? If you did, it’s possible that this costly form of protection will not be useful if you have to file a claim.
Payment protection insurance (also known by unemployment insurance) is a simple concept. If you have a sudden decrease in your income (e.g., losing your job), it’s a way to pay out to cover your loan payments.
Great!
It doesn’t actually work that way in practice. After the Citizens Advice bureau discovered that 85% of the clients’ PPI claims were denied by the provider, the Office of Fair Trading (OFT), launched an investigation into payment security insurance.
PPI premiums in the UK amount to PS5.4billion per year. The insurers pay just PS1billion from this amount. This leaves them with more than PS4billion in pure profit. It’s no wonder that they are so eager to ensure your “protection”.
Insurance companies’ greed is their main problem. Insurance companies are so eager to make every penny possible from their customers that they sell payment protection insurance to anyone who is willing to buy it. Even if they don’t need it.
Lenders will often sell insurance to anyone without verifying that the customer is eligible. The majority of claims will be denied if the customer has a reason to claim.
Contract workers, part-time workers, self-employed, and people who quit work voluntarily, are all likely to be excluded.
Policies may also exclude people of certain ages, those with pre-existing conditions, and people who are responsible for their own injuries, stress, back problems, or complications from cosmetic surgery.
PPI policies can also be cancelled if an insurance company determines that you knew you were sick or are likely to lose your job.
If all of that isn’t enough, policies must be in effect for a minimum period of time before a claim can possibly be made. Even if your claim is successful, it could take several months before the money arrives. It won’t reduce your original loan, only the interest. Then, just when it seemed like things couldn’t get worse, most policies only cover your monthly payments for 12 months.
1 Know the score
Although payment protection insurance isn’t mandatory, many lenders suggest it by adding PPI to their quote. You don’t need to have PPI in order to obtain a loan. If your lender is putting pressure on you to accept the coverage, then look elsewhere for your loan.
2) Avoid PPI
If your situation is not in accordance with the policy’s terms or you are unable to find a quote, you might consider avoiding PPI. Instead, you could use the money it would have cost to create a cash reserve for emergency situations. You should have enough cash to cover your expenses in case of a sudden drop in income if you can build up six months worth of loan repayments. If that does not happen, you can still control the money and increase the profits of insurance companies.
3) Go Independent
PPI may be useful in certain situations, but you should always carefully review the terms and conditions. To ensure that you don’t pay extra, read the fine print in your loan agreement. Look for an independent company that can provide PPI if you are not satisfied with the terms of your loan agreement. Your lender may charge much more.
If you want a PPI policy that covers a personal loan over five years, premiums could be 20-40% of the amount borrowed. For example, to cover PS20000 worth of debt, you could pay between PS4000 and PS8000 (PS66 per monthly extra) for PPI over the term of the loan. One of the most severe cases was that of a borrower who borrowed PS72000 and PS44000 for PPI.
If you want PPI, an independent insurance company like Paymentcare, Free Insurance, British Protection or Free Insurance may be a good option. The typical cost should be between 4-6% and 5% depending on the amount.