Making a racket about protection

Payment protection insurance has taken a beating with regulators and consumer campaigners targeting it as waste of money which often doesn’t pay out when customers need it.

Even TV brainbox Carol Vorderman has struggled to make payment protection insurance – or PPI – add up with campaigners criticising her for promoting firms which sell PPI.

Investigations by Which?, the Financial Services Authority, the Office of Fair Trading and the Competition Commission have all criticised PPI which is usually sold along with credit cards and personal loans and is meant to pay out if you can no longer keep up payments.

The PPI lowdown

Critics point to the low payout rates on PPI and the expense of the insurance as the major problems with the insurance.

On a £10,000 loan from some providers PPI can cost as much as £4,100 over five years adding up to £69 a month to repayments. Insurers justify the cost on the basis that you are covered from the start of the loan so they are taking a big risk.

They argue they are effectively loaning you the cash to insure your loan so have to charge you for the privilege.

The Office of Fair Trading says around 20 per cent of the premiums collected on PPI are paid out to consumers. That compares with 82 per cent of the premiums collected on motor insurance and 54 per cent of the premiums collected on home insurance.

PPI losers

Exclusions on PPI can be tough and there are a lot of people who shouldn’t take it out, according to campaigners.

If you are already unemployed then PPI will not pay out. If when you take out PPI you already have a medical condition then it won’t pay out.

And similarly if you are a contract worker or a freelance then PPI won’t cover you in the event of making a claim. Banks, building societies and other loan firms are supposed to tell you about the exclusions but sometimes they don’t.

Beat the hard sell

Loan firms and credit card companies are often accused of taking a hard sell approach. They automatically add the cost of PPI to loan agreements when they’re not meant to do.

You should be asked if you want PPI and it should be explained to you when it will pay out. Always ask for monthly repayments on loans to be quoted without PPI.

PPI winners

PPI is still valuable as it can provide important protection if you cannot work and have significant loans to fund.
The way to be a winner though is to make sure you don’t fall foul of the potential pitfalls. Always check first whether you need insurance. Some firms will provide help if you cannot work through illness so ask your employer first.

Ask the PPI firm if there are any exclusions on the policy – if you are on a fixed-term contract you may not be able to claim so check that before you buy.

Tell the insurer if you have any pre-existing medical conditions – they can then advise whether or not you’re covered.

Shop around for the best policy before you buy. You don’t have to take the policy the bank or loan firm is offering.

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