Table of Contents
- The Basics
- Types of PPI
- Policy Details
- Price & Protection
- Alternative Approaches
- Other Considerations
Mention PPI to a random person on the street and their mind will invariably turn to the scandal that was the mis-selling of policies to customers from the 1990s onwards and the claims for compensation that have exploded in recent years. Subsequently, the very idea of payment protection insurance has been tainted despite the fact that, in some circumstances, it can be a suitable form of cover to get. In this article, we’ll explore the ins and outs of PPI and explain why someone might buy it.
If you were looking for an article detailing ways to reclaim mis-sold PPI, here’s a link to our comprehensive guide.
The Basics Of PPI
The idea of buying this form of insurance is to cover any payments that you might have on outstanding credit. This could be your mortgage, a loan, a credit card, or something similar.
In other words, if you lose your source of income for any number of reasons, the insurance company will continue to pay off one or more of the credit arrangements you have in place, thus preventing you from falling behind and potentially getting into financial difficulty.
Just like any form of insurance, you pay a premium – in the case of PPI it is usually monthly – and you can make a claim if and when you need to (assuming the right conditions are met which we’ll go into shortly).
The Types Of Payment Protection Insurance
When you take out a PPI policy, you will have to choose between the three types available:
- Unemployment cover will pay out should you lose your job through redundancy.
- Accident and sickness cover will protect you when you are unable to work after an accident or because of a long term illness.
- Accident, sickness and unemployment policies will provide cover under each of the above circumstances.
When you take on this form of insurance, you should think carefully about the type of protection you are most likely to require and what other cover you might have in place (see below for further details).
Looking At Policy Details
Just like any form of insurance, there is a significant amount of detail within a PPI policy that will directly impact how suitable it is for your circumstances. This section attempts to cover all of the most important points to look out for.
There will almost always be a period of time after you find yourself out of work before you are entitled to make a claim. The timeframe found most commonly on PPI documents is 30 days, although it is possible for this to be as much as 180 days.
Clearly you need to be comfortable with the excess period of any policy you buy, especially if it is longer than the standard 30 days. During this time, you will have to find a way to make the repayments on whatever credit you have covered.
Some policies do provide a process where your claim is backdated to the initial date of unemployment. So while you will not receive any money during the excess period, once you become eligible for payment, you will be paid for that entire time as part of your first instalment.
Generally speaking, a longer excess period will result in cheaper monthly premiums so think carefully about the length of time you might comfortably be able to continue making your credit repayments. If you have sufficient savings to cover 3 months worth of your mortgage, for example, then you can buy a policy that only starts paying out should unemployment continue past this point.
Length Of Payment
One thing to make absolutely clear is that PPI will only continue paying out for a fixed amount of time after a claim begins. This is usually around the 12 month period, but depending on your needs, you may be able to get a policy to cover you for anywhere between 6 and 24 months.
It goes without saying that if you find employment, you will stop receiving any further instalments. However, the exact timing of the last payout is something to look closely at – chances are that you will receive payments in 30 day blocks so if you enter work on day 25, for example, you may not be entitled to the money you would have otherwise received 5 days later.
This is worth thinking about if you can negotiate your new start date so that you don’t miss out on an instalment.
Type & Length Of Employment
Many PPI providers will have some stipulations about the type of employment that is required for their standard policies:
- you will typically have to hold a full time position with an average working week consisting of at least 16 hours
- these hours should ideally be for a single employer; if you work for multiple employers, you may not be able to get PPI
- if you work full time but on a contract basis then this may also make it harder to buy cover
- you should have been in employment consistently for at least 6 months, but more commonly 12 months is the minimum
- self employed people can get cover, but the instances where you are able to claim might be quite restricted
- it is highly unlikely that you’ll be eligible to make a claim if you were sacked from your job or if you leave without good reason
- taking voluntary redundancy is also unlikely to result in a successful claim
- if the redundancy is foreseeable (i.e. you know that your job is at risk before buying the policy), then you may not be eligible to make a claim
The Fine Print Regarding Sickness & Accidents
A PPI policy will not typically cover every type of illness or accident that may befall you. Here are some points to consider regarding this:
- pre-existing illnesses or conditions will almost certainly be excluded from any claims – these should be disclosed to the insurer before purchasing
- you may also be asked about yours and your family’s medical history which could impact the price you pay
- incidences involving alcohol, drugs or other substance abuse are not likely to be covered
- mental illness, including thing such as stress or anxiety, which prevent you from working are often excluded
- pregnancy related conditions may or may not be covered and you should check before buying
- some types of accident may not be covered by insurers – these may include those suffered during a high risk leisure activity such as skiing or mountain biking
Prices And Levels Of Protection
The amount you pay when buying payment protection insurance will vary depending on a number of factors, some of which have been mentioned above. Here are some of the other things that will impact the quotes you receive:
- the thing that will impact the price the most is the amount of cover you require – a £100/month loan repayment is going to be much cheaper than an £800/month mortgage for instance
- where you buy your policy matters a great deal – in general we recommend you avoid taking PPI out directly with the lender and, instead, look at buying a standalone policy from a separate company
- the length of time that payments continue for also plays a big role in the price you pay – cover for 12 months is going to cost you less than for 24 months even if you only claim for a shorter period than this
- how you pay also makes a difference – if you pay upfront in advance then it will work out cheaper than monthly instalments, but if you include the upfront cost in the loan itself then you’ll pay interest on it and it could end up costing more
- you should ensure you are fully aware of the rights of the insurer to increase your monthly premiums should they wish to – they can do this for a number of reasons that they see as adding risk to your circumstances
Consider The Alternatives
There are other ways that you might be able to get by in the case of you losing your job. In some instances, these may be more appropriate than PPI and should be considered carefully before any policy is taken out.
Income protection insurance – this also pays out when you lose your job, but it works in a number of different ways.
Firstly, it pays out a percentage of the salary you have lost rather than a specific amount to cover the repayments of a debt. Depending on this percentage, it may be more or less than what you’d receive from PPI, but typically it will be more.
Secondly, you can choose to spend the money you receive in any way you like whereas an instalment from a PPI claim must go on the repayments of the debt specified in the policy.
Thirdly, you continue to receive payment from income protection for as long as you are unable to work or as long as the term stated on the policy. Unlike PPI, which is normally restricted to 2 years at most, it is possible to buy income protection that pays out right up until retirement age.
Critical illness insurance – this form of cover pays out a lump sum at the point at which you are diagnosed with a long term condition or suffer something such as a heart attack that prevents you from working.
It is designed to help pay off mortgages, loans and any other debts you might have among other things.
It will not, however, cover unemployment caused by non-critical illnesses or accidents and it will not help if you are made redundant.
Savings – do you have sufficient savings (or other capital that could be easily turned into cash such as shares or bonds) to cover a period of unemployment? If so, ask yourself whether you really need to buy PPI to provide for this type of situation.
Employer benefits – does your employer offer out of work benefits for those staff members who suffer an illness or injury? Many companies, especially the larger ones, will continue to pay you some level of income even after your period of statutory sick pay ends.
Help from family members – while it’s not something many of us would enjoy asking for, it is worth finding out whether any of your family would agree to help out on the essential bills and credit repayments should you ever find yourself out of work.
Final Considerations When Buying PPI
This form of insurance doesn’t quite deserve the tarred reputation that it unfortunately holds thanks to the mis-selling scandal and, in the right circumstances, it can be a financial product worth considering.
When looking at quotes from different companies, always try to match the details as closely as possible to get a fair comparison. Don’t assume anything and ask questions at any stage where you feel unsure about something.
Always read the policy document thoroughly before committing and ensure that you are fully aware of the instances in which you won’t be covered; it is a legal obligation for insurers to make you fully aware of these when selling you a policy.
You have the right to cancel a new policy within the first 30 days and you should be refunded any premiums that you might have already paid (some costs may be deducted). You cannot be charged a specific fee for cancelling the policy. After this point, if you pay monthly premiums, you are usually able to cancel them at any time, although some insurers may specify a notice period in such a case.