Payment Protection Insurance, designed to provide cover if you are unable to pay off a personal loan, mortgage or credit card debt, has come in for yet more criticism – this time from the Competition Commission.
Most of the 14m-plus outstanding PPI policies are sold at the same time as the consumer takes out a loan to make a purchase, so the company selling the policy faces little or no competition. The result is that customers are being overcharged by more than £1.4bn a year, according to the commission’s investigation.
In one recent case, cited by Citizens Advice, a couple took out a secured loan which included PPI. At no point in the discussions did the person selling the loan mention that the cost of protection was £21,000 on top of the £85,000 loan making a total of £106,000. When the client had to stop work because of ill-health and tried to claim on the policy, she was told she could not claim for sickness as only her partner was covered. The loan company refused to refund the premium.
This example is not unusual. PPI is meant to safeguard a borrower’s repayments against serious illness, disability or redundancy. But purchasers have frequently found that they are disqualified from claiming – despite having paid the premiums – because of their health record, because they are self-employed or on short-term contracts.
PPI is very profitable business for the banks, credit card companies and other lenders keen to compensate for low interest rates or discounted show room prices by selling add-on products. The claims ratio – claims as a share of premium income – is estimated at between 15 and 20 per cent, much lower than motor insurance at 74 per cent and household insurance at 55 per cent.
Because most PPI policies are sold as an add-on to a loan being offered to fund the purchase of, for example, a car or large household item, buyers tend to make a snap decision to buy and often pay little attention to the terms. Many people are unaware they can buy PPI from other providers and they rarely shop around to compare prices and policies.
The Commission is looking at a number of proposals to prevent rip-offs. These include a requirement to disclose the cost of PPI and a statement of "key messages" telling customers that there are competing sources of cover, that PPI is optional and does not increase the likelihood of their obtaining credit.
It proposes banning the sale of PPI at the point when the purchaser takes out the loan and within a fixed time period of the loan transaction. Sometimes purchasers discover they have got a poor deal and try to switch but are dissuaded by the terms of the policy, such as initial exclusion periods. The commission suggests that all policies should be renewed annually, that an annual statement of the cost and a reminder of the customer’s right to cancel should be required and that single premium policies – involving an upfront payment of the entire premium – should be banned.
My advice if you are making a large purchase is to think very hard before taking out PPI. There is no point paying so much in extra insurance premiums that you make it harder for yourself to pay off the underlying loan. Look very closely at the terms, the cost and most particularly any exclusions. Compare what is on offer with what is available elsewhere. An alternative that is worth considering is income protection insurance. This is not tied in to any specific purchase and the cover can last for longer.
By Charles Batchelor