Although a few people feel 100 per cent confident about borrowing money, it is a fact of life for many people. Many items like expensive home extensions or new cars are simply beyond the financial means of many households. Saving up may be impractical, and borrowing can be quite manageable and sensible in the right circumstances. However, no-one can tell what the future holds and an unfortunate accident or illness can see someone end up without their income after a period of time. This can leave them struggling to pay back a debt. Thankfully, loan protection is a possibility for anyone worried about not being able to keep up with commitments in future. For a regular premium, insurance companies will help back someone’s ability to keep up with commitments if they lose their job through no fault of their own.
Loan protection will kick in if someone suddenly finds themselves without a wage due to illness, injury following an accident, or involuntary redundancy. For example, someone may owe £8,000 on an unsecured personal loan. If they suffer a car accident and face being out of action for over a year while they recover, they could find their employer’s sick pay scheme is inadequate and means they can no longer keep up with commitments on a debt after a period of time.
Loan protection would kick in and provide the policyholder with monthly repayments in such circumstances after they have lost their income. In this sense a policy is designed not just to provide peace of mind but to help keep creditors from the door so someone can concentrate on getting better and getting back to work. It will also help safeguard someone’s credit rating, potentially ensuring that they are able to borrow again in future if they need to.
It is important to work out how much cover someone needs. A potential policyholder might want to work out what percentage of the regular repayments on a borrowing commitment they will be able to meet themselves each month if they did find themselves without a wage. For example, someone might feel they could meet about 40 per cent of the repayments for a while without an income and so would need an insurance policy which covers the remaining 60 per cent of the repayments.
After a successful claim, an insurer simply pays the agreed cash sums into someone’s account each month tax free. A month will normally need to pass before the first payment arrives, but some policies backdate the payments to the first day the claim was made. These payments will continue for 12 to 24 months, depending on the policy or until the loan happens to be paid off.
Different policies are available which protect against different things. For example, someone may feel they do not need protection for falling ill or being injured or are not worried about redundancy. Insurers often provide policies which protect against redundancy and not sickness, and vice versa.
Simon Burgess is managing director of payment protection specialists British Insurance. He said: “I would say it pays to shop around when looking for loan protection. Banks and other lenders all too often offer customers bad deals when providing them with loans. Someone could be better off going for a standalone policy like ours which might save them money while providing just the same level of cover or even better.”
For many years I have been a staunch campaigner against the major names in finance who, I believe, rip-off their customers by selling over priced, often unsuitable payment protection insurance (PPI) cover.