Imagine for a second if you were to suddenly lose your income after becoming incapacitated or becoming unemployed. Where would you get the income from to continue meeting your mortgage or loan repayments each month? Where would you get the money to maintain your rent, utility bills or even the family food bill for the month? All of these outgoings would have to be met somehow. One way of protecting against the unknown to ensure you would have an income is to take out payment protection.
What does payment insurance do?
Payment protection insurance (PPI) does exactly what its name suggests; it provides you with payment security. You would choose the type of insurance needed and then receive a payment each month towards being able to continue servicing the payments you have chosen to protect.
This income would be tax free and could stop you from falling into debt with your repayments. It would be essential to keep your mortgage repayments up to date otherwise you would be at risk of losing your home. Payment arrears of a secured loan could also mean you losing your home and life would become very uncomfortable if you were unable to keep the home warm and lit. With payment insurance behind you there would be an income coming into the home.
When can I make a claim on the insurance?
Checking the small print of any policy you are considering taking out is essential as some payment insurance providers will allow you to make a claim on your protection policy once you have been unable to work or have been redundant for 30 days. However some might also state a deferment period of 90 days before you are able to make a claim.
If you are taking out protection for your mortgage repayments then you would have to consider the fact that mortgage lenders could choose to start legal proceedings against you with as little as just a few months’ mortgage arrears which you cannot repay. If you have to wait for 3 months before seeing any benefit your lender could already have begun court proceedings.
How much money would I get from the policy?
When taking out payment protection you would be able to choose how much of your mortgage or loan repayment or your income you want to protect. This amount would be pre-agreed with the provider and is the amount you would get back each month as tax free payments, should you need to make a claim.
If you chose to protect your monthly income for example with income insurance protection then typically providers could allow you to insure half of the gross monthly income you bring home or £1,500 whichever happens to be the least amount.
How long would payments last?
The length of time the provider would continue providing you with an income would again depend on your provider so checking before taking out cover is essential. Usually providers will offer protection that pays out for either 12 months or 24.
Payments over 12 months could provide more than enough time for you to have searched and found work or to have made a recovery and been able to get back to work. During this time you would have peace of mind of a substantial sum of money towards your repayments and outgoings.
Another point to consider is that the premiums for a 24 month policy would be a great deal more than cover lasting for 12 months.
Would you be eligible to take out protection?
As with any type of insurance you would have to check payment protection to ensure that you would be eligible to make a claim on a policy. All providers will give you the information you need to ensure that you can check before taking out cover.
For instance to be eligible you would have to be in full time work and have worked for at least 6 months before taking out the cover. You would also have to live in the UK, Isle of Man or the Chanel Isles to be eligible to take out the protection.
What other exclusions could there be?
The exclusions would depend on your provider with some adding more than others into their payment protection insurance. Therefore when comparing the premiums for the policy you should also compare the small print and check what exclusions there are in the policy.
If you suffer an ongoing illness at the time of taking out the policy then you would have to check very carefully as there will be limitations.
Certain illnesses would also be excluded and these might include illness brought about through stress or depression.
If you are self-employed then you would also have to check carefully as usually you would only be able to make a claim if you had to stop trading permanently through no fault of your own.
Of course these are just some of the most common exclusions and there could be many more.
Choosing the level of cover needed
When taking out payment protection you can choose the level of cover you want. Unemployment and incapacity cover can be taken out together. In this case you would be eligible to make a claim if you were to suffer from either of the events.
Should you be one of the lucky ones who gets a full sick pay plan then you might just want to consider taking out insurance against the possibility of redundancy alone. If it suited your lifestyle better then you could consider just taking out incapacity insurance as a standalone policy.
The events you cover would reflect on how much you pay for the premiums. Therefore you will only be paying out for protection that you need.
The different types of protection insurance
If you have mortgage repayments to protect then mortgage payment insurance should be considered. With this policy behind you there would be a substantial amount of income coming into the home that you would be able to use towards meeting your mortgage repayment each month. This would help to ensure you keep out of mortgage arrears.
Loan insurance would protect your monthly loan repayments. Secured loan repayments that you fall behind on can lead to repossession of the secured property and loan cover would supply an income to ensure you were able to continue servicing your loan repayments. Unsecured loan debt could also see you being taken to court and losing your possessions to bailiffs. With cover behind you there would be less chance of this happening.
If you covered your income with income payment protection then you would have money towards all of your essential outgoings. Cover could make your life a great deal easier during your unemployment or incapacity.
Why you should consider protection insurance
Many individuals believe that they would be able to get benefits from the State if they lose their income. While you could get money from the State you would have to prove that you were eligible.
If you were to claim an income from the State that for your mortgage repayments you would have to realise that you would only receive an income towards the interest part of your mortgage and up to a defined amount. You would also not get any money until the 13th week and by then you would already be in arrears of 3 months.
If you want to use the income for your essential outgoings you would have to take into account that very often any money you are entitled to from the State often nowhere near matches the income you are used to bringing home.
Ensure you get a good deal on your insurance
If you choose to shop around and compare the premiums for payment insurance then you stand more chance of getting the best deal. Standalone providers could save you as much as 40% on mortgage cover and 80% on loan protection. You would also be able to compare the small print of the cover with different providers so that you get the right policy for your needs.
Should you take protection offered by the lender then you will usually pay way over the odds for the insurance. At the moment lenders work out the total cost of payment protection over the term of the loan or mortgage and then include it in with the money you borrow and you pay interest on the protection. You would also not be able to choose the events to cover, nor how much you want to protect.
The benefits of having protection behind you
The biggest benefit to having payment protection behind you is the peace of mind that cover brings. Without an income coming into the home so that you are able to maintain your outgoings and repayments your life would be a great deal more stressful than it would be if you have cover behind you.
You would know exactly how much money you would have coming into the home each month and how long it would last. This would leave you free to get on with looking for work or to concentrate on a recovery.
Of course by choosing to shop around and compare the cost of payment protection you can be assured of getting the cheapest policy for your needs, which could be tailored to suit your individual lifestyle.
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