Payment protection insurance (PPI) is a product sold with loans, credit cards and mortgages and other credit products such as car finance and catalogue accounts. PPI can also be purchased separately as a stand-alone policy from an insurance company, where it is not linked to the mortgage, loan or credit card covered by the policy.
The purpose of PPI is to cover the repayments on any of the above products when you are not able to. You can make a claim if you are unable to work due to accident, illness, disability, redundancy or death. Under your policy, depending the terms and conditions, all or some of your credit repayments will be covered for a time, usually 12 months, but this can differ from policy to policy.
Do I need PPI?
The need for PPI protection is dependent on your personal finances and the amount owed. It can be a financial lifeline if you cannot keep up with debt repayments because of job loss or ill health.
If you have savings for a ‘rainy day’, you may not want or need PPI cover as you would be able to meet your repayment obligations, despite a drop in your income.
On the other hand, if you do not have a financial safety net and are worried about meeting financial obligations if you lost your job or are unable to work due to illness or an accident, PPI could be the answer.
However, it is important to check that you will be covered should the worst happen, for example are you doubling up on cover offered by your employer?
Those who generally will not receive PPI pay-outs are the unemployed and the self-employed. Most policies will not cover stress-based claims, bad backs or pre-existing medical conditions not specified at the time of taking out the cover.
For those who are covered, it must be remembered that after making a claim some policies do not start straight away. There will be a gap from when the incident occurred, making the claim to receiving the pay-out. Having some savings will help.
How PPI was paid for
Payment for PPI was applied in different ways depending on the product sold.
The entire cost of the PPI premium was added to the amount borrowed on some loans. The premium, plus interest was then paid off by the borrower, over the term of the loan. This is in addition to the repayment of the loan itself with interest. This is known as a single premium PPI policy which was banned in 2009.
For mortgages, the PPI was paid for by a monthly premium by borrowers.
When it comes to credit cards, these were also paid for by monthly premiums. However, the premium was added to the amount owed on the card at the end of each month. Here the cost of the premium was a percentage of the balance due for that month. In the event of a claim, the amount paid out was usually between 3-10 % of the what was owed i.e. the minimum monthly payment.
Products sold with PPI
If you ever had a loan or used credit cards you may have had PPI with the product. PPI was sold with the following products:
- loan – this includes personal loans and business loans
- credit card
- store card
- mortgage
- loan secured on your home
- overdraft
- car finance
- other finance agreements or hire purchase
- home shopping account
