PPI

The number of consumers with payment protection insurance policies has risen to more than 15m as borrowers have taken precautions against lifestyle changes that could threaten their ability to repay loans. But the Financial Services Authority last week called for “urgent action” by providers of these policies to improve compliance after an investigation highlighted frequent poor selling practices.

What are these policies?
Payment protection insurance (PPI) can be taken out against any loans, including mortgages, credit cards, personal loans and hire-purchase agreements to safeguard the borrower’s repayments in the event of serious illness, disability or redundancy.

How do they work?
If a borrower takes out PPI on a loan they will have to fork out an upfront lumpsum payment or agree to pay insurance premiums monthly. If during the repayment period the consumer qualifies for a claim, the lender assumes responsibility for repayments for a specified period. Most policies cover interest costs as well as repayment of modest amounts of outstanding capital. Some also wipe outstanding debt in the event of death.

How much do they cost?
Costs vary depending on the borrower and the level of debt but PPI can prove expensive. Which? has warned that a PPI policy can effectively double the cost of a £5,000 personal loan.

For a £10,000 personal loan with Abbey repayable over five years, the cost of PPI would be about £60 per month (equivalent to a monthly interest cost of more than 1 per cent), according to Moneyfacts, the data provider. On personal loans, PPI lumpsum premiums are often added to the loan amount and interest is frequently charged on this premium.

For mortgages and credit cards, borrowers usually pay 4 to 5 per cent of the outstanding balance as a regular monthly premium, although some standalone policies can be noticeably cheaper.

How much will the policy pay out in the event of a claim?
This varies depending on the policy. For credit cards, PPI policies can pay out as little as 2 per cent or as much as 10 per cent of the outstanding balance per month, usually for a 12-month period. For personal loans and mortgages, the lender will normally assume responsibility for monthly repayments for between nine and 12 months, although some policies can run for up to 24 months.

Who are these policies aimed at?
These products are generally aimed at fully-employed borrowers who do not have any other form of sickness or redundancy insurance. Policies will not normally pay out for any pre-existing health conditions. Self-employed workers may find that the cover only applies if they wind up their businesses and contract workers may also be excluded from some areas of cover.

What other exclusions should I be aware of?
Most policies enforce a minimum time period – usually at least 14 days – that you must be off work to qualify for cover. Age restrictions also often apply.

Who offers PPI?
All the big lenders are keen to sign customers up to PPI when they apply for a loan. Borrowers can either take the PPI offered by the lender providing their loan or can shop around from another provider.

Is PPI always optional?
The banking code stipulates PPI is not a condition of borrowing. However, watch out for lenders who automatically include PPI in their quotes.

What are the FSA’s concerns over these policies?
The regulator is concerned over the way these policies are sold. The FSA found that one in three companies was failing to comply with regulatory standards. The worst area for compliance was single premium PPI business, where commission levels were high and companies were criticised for not supplying detailed information on the products and prices offered. There was also concern that lenders were selling PPI too aggressively.

So is PPI really worthwhile?
You may already have some sickness or disability cover through your employer, in which case you may not need PPI. If not, for mortgages, where any default on payment could threaten your home, it is probably wise to have some protection but standalone providers often offer cheaper cover than your lender. For personal loans and credit cards, PPI can be expensive and limited, so your money may be better spent elsewhere.

If I decide to take PPI, how do I make sure I get a good deal?
Seek reliable advice before you sign up to these policies. Make sure you are fully aware of the exact terms of the product. Some policies just cover sickness and accidents, while others protect against redundancy as well. Ask the lender what exclusions apply, how much the cover will cost and how much the lender will pay in the event of a claim.

Are there alternatives to PPI?
Yes. Instead you could take out an income protection plan, sometimes also referred to as permanent health insurance – which would pay a monthly income in the event you are unable to work. This would allow you to spend the income as you like, rather than going straight to pay off loans. Critical illness cover and life insurance, which usually pay out lumpsum benefits, are also possible alternatives to PPI.