Payment Protection Insurance (PPI)

PPI can cover your loan repayments for a fixed period of time should you no longer receive a salary due to an accident, sickness or unemployment.

What it does

PPI will pay out a sum of money to help cover your monthly repayments on a mortgage, loan, credit card, store card or catalogue shopping payments if you make a claim. You might need to claim because you have had an accident or sickness, or become unemployed through no fault of your own.

The insurance company will pay the monthly repayments (or a percentage of them) on your behalf for a fixed period of time if you make a claim.

PPI is not the only product designed to protect against loss of income and may not always be the most appropriate. Although PPI can provide worthwhile cover against unexpected changes in your personal circumstances, you should bear in mind its limitations and exclusions as well as possible alternative products - such as income protection.

How it covers you

This will vary depending on the sort of repayments that the policy is designed to protect and on the terms of the particular policy. The following benefits are typical for different types of PPI cover:

Mortgage
- it covers your monthly mortgage repayments for a set period of time. The maximum number of monthly repayments that the insurance company will make is usually 12, but it can be up to 24. This means that after this period you will have to pay your mortgage repayments yourself again.

Credit and store cards
- a PPI policy generally pays off a percentage of your outstanding balance or the minimum payment each month for up to a year. Check which of these options is offered. This means that you may still have to pay any balance left after this time. The insurance typically only provides cover for the amount you owe when you make a claim and not any balance that you may build up after this.

Loans
- PPI covers your monthly repayments for the loan, generally for 12 or 24 months. After this period you will have to pay your loan repayments yourself.

If the insurance for any of these products contains life insurance, then the cover will generally pay off the balance of the debt covered if you die. If the claim is for disability the monthly repayments may be paid to the end of the life of the loan.

You should read the key policy information that comes with any policy that you take out. This sets out the main features and benefits of the policy as well as any significant or unusual exclusions and how long the cover lasts. If unclear, ask the salesperson to go through it with you and make sure that you are happy before you take out the policy.

The main features
All PPI policies differ, so always shop around and double check with the provider selling the product whether it includes the features you need it to.

It is important to be aware that PPI is almost always optional - for example, you should not be refused a loan if you decide not to buy payment protection insurance. If in doubt, ask your provider whether it is optional.

  • PPI only pays out for a set period of time, usually 12 months.
  • Many policies will not pay out for the first couple of months after you have made a claim and some may not backdate any payments. This may mean you need to consider how to cover these repayments before the policy starts paying them.
  • To claim on the unemployment part of the policy you must have typically been employed continuously by the same company for the last 12 months on a permanent contract.
  • The policy may not cover you if you are self-employed so make sure you check.
  • You may not be able to make a claim for an illness you already have or have had before. Make sure you check this before you take out the policy. This will be called a pre-existing medical condition and can include any medical conditions you have, even if they have not troubled you for a while.
  • Stress or back complaints, and possibly other conditions, may not be covered even if you cannot work because of them. Again, it is worth checking before you take out the policy.
  • One of the significant limitations in some policies is the ability of firms to increase the amount of premium payable and reduce the amount of cover by giving you notice.

If you are in any doubt, ask the salesperson to explain any parts of the policy that you may not be able to claim on (the exclusions and eligibility conditions). Make sure that you fully understand the exclusions before you buy the insurance.

When to buy it
You're likely to be offered PPI by a company when you take out a mortgage or other loan or form of credit agreement but you do not have to buy it from them. You can buy it yourself separately from insurance brokers or over the internet but be sure to shop around to get the best deal for you.

PPI is useful, but you may not always want it or be able to claim on it when you need to.

Costs
Interest rates and APRs for loans, mortgages and credit or store cards do not usually include the cost of any PPI policy, so comparing interest rates on their own will not be helpful if you are taking out PPI.

The salesperson must tell you how much the PPI will cost you separately from the cost of the loan over the life of the policy. They must also tell you whether buying the policy is compulsory. You can pay by a single upfront premium or by regular monthly premiums. The single premium can be added to your loan, thereby increasing what you borrow. A regular premium is a set amount you pay each month.

The salesperson should quote you a monthly figure for the PPI and the total premium for the lifetime of the policy, whether they are quoting for a single or regular premium.

If you take out PPI paying via a single premium bear in mind that, as this premium is normally added to your loan, you will be charged interest on that as well. A regular premium may be cheaper because you will not be charged interest. If in doubt, ask the salesperson to clarify what sort of premium they are quoting for.

Key things to consider

  • Think carefully about the risks you could face while paying back a loan, mortgage or credit / store card and whether taking out PPI or another product (such as income protection) would be to your advantage. If you had an accident that stopped you from working, would you have enough money from other sources to be able to continue paying off the debt?
  • Consider whether you may have other insurance which already covers you, such as sick pay or death-in-service benefit through your employer.
  • Do not be pressured into buying PPI. It is very rare that you have to take out PPI to get a loan and you definitely do not have to buy it from the same firm that you obtain your loan from.
  • Check the total amount of benefit you may receive from the policy, compared to the cost of the cover over the duration of the loan.
  • Make sure that you carefully check application forms when you apply for a loan or credit online. Although many firms have agreed not to do this, PPI may have been selected as an option by default and you would then need to ensure that you change – or ‘un-tick’ - this option if you do not want to buy the cover.
  • Print out or keep copies of completed forms in case you need to complain or make a claim in the future. If you discover that you have bought PPI online but did not ask for it or require it you should first complain to the firm that sold you the policy to give them a chance to put things right. If you are not happy with the outcome you may be able to take the complaint to a financial services ombudsman or a regulatory authority.
  • Find out whether the firm is giving you advice. If not, consider whether you need advice. Getting advice means that the firm should recommend a PPI or other policy that is suitable for you and clearly meets your needs.
  • Find out whether you are paying for the policy by a single or regular premium. If you buy a single premium policy you will pay a lump sum of, for example, 3 or 5 years' worth of premiums in advance. This amount is added to the sum you borrow and attracts interest so you will be paying more over the long run.
  • Check whether the PPI cover lasts for the length of the loan. Some policies do not always last as long as the term of the loan. For example you may have a 15 year loan but the PPI policy may only cover you for the first 5 years. Think about how you will protect your repayments after the policy has ended but you are still paying back the loan.
  • Check if you would have to continue to pay for PPI if you take it out at the same time as a loan but then you repay the loan early.
  • Think about what you would do if the claims payments stop (usually after 12 months) and you are still unable to work. How would you repay the rest of your loan?
  • Check to see what you will and will not be covered for e.g. any exclusions or limitations relating to the nature of your employment or your medical history.
  • Check whether payments from a PPI policy would affect the benefits that could be paid from other protection insurance that you may already have.
  • Check what you would get back if you cancel the policy or repay the loan early.
  • Shop around and compare the features and costs of PPI products.

Issues relating to the sale of PPI products in the UK
In recent years, there have been some significant issues with payment protection insurance policies being mis-sold. In general terms, this means that PPI policies have often been sold to customers who either; did not need the cover; were not asked whether they wanted PPI; or were sold a PPI policy that was not aligned with the type of debt or financial commitment that they entered into at the time they were sold the PPI product.

The Financial Services Authority (FSA), the financial services regulator in the UK, has proposed a package of measures to reform the PPI market and protect consumers. The aim of these measures is to ensure that customers are treated better when buying payment protection insurance and treated more fairly when complaining about it.