Payment Protection Insurance

Payment Protection Insurance (PPI) is something that hit the media spotlight in the late 2000s due to mis-selling.

What is PPI?

PPI is an insurance product sold alongside loans, credit cards, store cards and mortgages. It insures the repayment of the credit product if the borrower faces any circumstances that causes loss of income and subsequent trouble repaying the debt. This could include redundancy from work, illness, injury or even death.

Payment Protection Insurance typically covers the repayments for a set period, usually 12 months. In the case of loans or mortgages, this would cover the monthly repayment amount. In the case of credit and store cards this is usually the monthly minimum payment on the balance.

The controversy surrounding PPI

PPI hit the headlines in the mid-late 2000s, as it surfaced that millions of borrowers had been unknowingly sold PPI as part of their policy. It was discovered that banks, loan providers and brokers we’re encouraging the sale of PPI using large commissions. Many even disguised the insurance by saying the loan was ‘protected’ without even mentioning the cost or purpose of the insurance. As a result, the Financial Conduct Authority (FCA) fined several companies involved in mis-selling the insurance.

Since then, many UK banks have implemented provisions (often running into the billions of pounds) to compensate those who were mis-sold PPI.

Considerations before taking out PPI

If you are thinking of taking our Payment Protection Insurance alongside a loan, credit card or mortgage, there are several key points to consider.

Firstly, the cost of the policy. In the early 90s, it was found that total cost of PPI was almost as high as the total benefit that could be claimed. Nowadays this should no longer be the case. However, make sure you check the period of time that the policy will cover, and if there is a limit to the amount that you can claim on the policy.

Next, check what types of injuries and accidents are covered. For example, does it cover work-related stress or does it only apply to physical injuries? Also, does it cover any illnesses or injuries that you had before taking out the policy? Often, companies selling PPI will ask whether you have any reoccurring illnesses or injuries that may affect your ability to work in the future.

Another key factor to consider is the minimum length of employment that you must have before you can make a claim. Some insurers may require that you’ve served at your current employer for a certain length of time before you can make a claim.

Finally, it’s also worth checking whether you have any other insurance policies that could cover the repayments. PPI is not the only insurance policy that protects you against loss of income. Income protection and short-term protection insurance are not linked to debt, but they do both cover you against loss of income.

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