Payment protection insurance

Despite its questionable past, PPI can help protect you financially if you lose your income and are unable to make repayments on loans.

Payment protection insurance, or PPI as it’s also known, is a type of income protection used to cover specific loan repayments if you can’t pay them because you’re out of work due to illness, an accident or redundancy.

PPI used to be taken out alongside a loan, such as a mortgage or credit card. This can no longer happen, but instead, it can be taken out separately to cover payments towards these debts if you are out of work.

What is payment protection insurance?

Payment protection insurance is well known, largely because of the huge mis-selling scandal over the past decade. However, the product itself is designed to provide financial protection and to cover loan repayments.

If you lose your job – because you’ve had an accident, are unwell, or been made redundant – it can pay out a monthly sum to meet a specific loan repayment.

How does payment protection insurance work?

When you take out a new loan, you can buy PPI to cover payments for the loan. If you are then unable to make the payments because you’ve lost your job, it should cover these. If you are taking out a mortgage, for example, and are made redundant, you could use this insurance to carry on making payments. This would mean your credit score isn’t affected and there’s no risk of losing your house.

What is covered?

Each insurance policy will have its own terms and conditions. A policy will cover one type of debt and in general the following will be covered with PPI:

  • If you’re made redundant and weren’t expecting it
  • Illnesses or disability
  • An accident that stops you working
  • If your circumstances change, such as becoming a carer, and you can no longer work

What isn’t covered?

There are some general exclusions that apply to all PPI policies, including the following:

  • If you are fired, take voluntary redundancy, are retired or unemployed
  • You can’t claim within the first 90 days after you stop working, but you still need to make premium payments
  • Some illnesses aren’t included
  • Pre-existing health conditions

Do you need payment protection insurance?

The reason for getting payment protection insurance is to cover payments made towards a debt. If you did lose your job or you were too unwell to work and lost your income, would you still be able to make these repayments? Do you have another income stream you could use, could you borrow money from friends or family, are there state benefits you could use, such as universal credit, or could you apply for a mortgage or repayment holiday?

There is a lot to consider but before buying one of these policies, it’s important to weigh up all your options and to see what you already have in place.

Who doesn’t need payment protection insurance?

If you could continue to make repayments on a specific loan if you lost your income, then you don’t need this insurance. Similarly, if you know you’d be able to use another source of income – a partner’s income or state benefits, for example – then you probably don’t need one of these policies.

Payment protection insurance is only for those people who would really struggle financially if they lost their job, wouldn’t be able to make repayments, and wouldn’t be able to take advantage of help from anywhere else.

How much does payment protection insurance cost?

The cost of PPI will depend on your own circumstances and how much cover you need. Typically people who are less likely to claim, those who are younger and in good health, will pay cheaper premiums. The following elements will also determine the cost:

  • Your age and marital status
  • Your health and medical history
  • Lifestyle choices, including whether you smoke or not
  • Your profession
  • How much you earn
  • Your daily outgoings
  • How much debt you have and how much your repayments are

Have you been mis-sold PPI?

PPI was mis-sold by financial institutions for years and customers were often sold it alongside loans, and often without even realising it was being sold to them. It was also sold to people who didn’t need it.

Billions of pounds have since been paid back to customers in compensation and they had until 29 August 2019 to make these claims. While it’s no longer possible to make a claim for mis-selling of PPI, if you do think you were mis-sold you could always contact the provider and ask it to refund you. There’s no guarantee it will pay the money back, as it doesn’t have to, but it might be worth a try.

What’s the difference between PPI and mortgage protection insurance?

There are lots of types of insurance and it can be confusing to pick one, especially as several of them work in very similar ways.

Mortgage protection insurance is one of those and provides similar cover to PPI. However, PPI is designed to cover loan repayments. This can be for any loan such as a credit card debt or a mortgage. While mortgage protection insurance is designed to cover a loss of income and will protect your mortgage repayments.

What other types of insurance should I consider?

There are lots of other policies related to losing your income or not being able to pay regular outgoings. They include the following:

  • Accident, sickness and unemployment insurance (ASU). This provides cover if you lose your job because of an accident or sickness, or if you’re made redundant.
  • Unemployment insurance. If you lose your job unexpectedly, you could use this cover to supplement your income until you start working again.
  • Critical illness insurance. If you develop a specific critical illness, this policy provides a lump sum of money.

Bottom line

The thought of PPI may spark fear among most people and memories of the huge mis-selling scandal.

However, in some situations, this insurance can help. If you have no other way of making repayments on a loan, your mortgage for example, and you lose your job, PPI could provide help. Before you take the plunge and buy a policy, just be sure you’ve exhausted all other options and weighed up the pros and cons.

Frequently asked questions about payment protection insurance

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