Payment Insurance Explained

Many people already deal with the likes of car insurance, home and contents insurance and life insurance, but few are fully versed in payment insurance products, although they could prove crucial to some households in times of financial difficulty.

Although a topic with its fair share of jargon and controversy, the market itself is very simple to understand with the help of a few basic tips. Firstly, many of the terms often used within the market are variations or straightforward types of the same thing. Payment insurance is a term often used for several kinds of policy which all cover a person’s ability to make payments on regular commitments should they lose a regular work income through no fault of their own, typically through being injured in an accident, falling ill or being made redundant. Other common associated phrases are payment protection insurance, income insurance, mortgage protection insurance and loan protection insurance.

Payment Insurance from Burgesses

Over the last two to three years the payment insurance market has come under heavy scrutiny and received negative media reports. It is still undergoing a widespread review from the Competition Commission, which is not expected to finish until 2009. In 2007 five of the biggest names in the business were found to have been selling policies to people who did not need them or using aggressive practices. All were given financial penalties by the Financial Services Authority (FSA).

However, particularly in the current economic climate, the product remains highly relevant and could make all the difference should the worst happen and a person’s income be suddenly taken away.

A typical payment insurance policy will cover a set amount of a person’s regular income – usually 50 to 70 per cent or to around £1,000, the idea being they will still be able to pay the likes of household bills, credit card statements and mortgage repayments. Of course, many employers would offer sick pay, but statutory rules mean this can (at the time of writing) last for only 28 weeks – not long enough for an illness or injury which requires months or years of treatment. State handouts such as incapacity benefit or job seekers’ allowance are unlikely to be enough either – UK job hunters can expect no more than around £60 per week – which does not even touch the income of the average working Brit.

For many people, savings would also not cover these essentials should they fall ill or be injured, so an insurance policy is the safest possible way for many people to ensure they will be able to keep up with a range of commitments.

However most providers require applicants to meet a set criteria to qualify for a policy. This typically includes ensuring a person has worked in the UK for a set period of time, is aged between 18 and 64, and is not already suffering from an illness which is expected to soon see them unable to work.

Other common conditions usually apply. A policy will not normally pay out until around a month after a successful claim is made and will not pay out indefinitely, usually lasting about 12 months.

Payment Insurance

As with other types of insurance, a policy holder will have to pay out a premium on a regular basis – how much will depend on what percentage of income they want to be covered. The cost of a policy will also be connected to exactly what it covers. Some are very general and will cover a wide range of payments – others are more specific, such as mortgage protection, which only covers one type of payment. These can be useful for people concerned about one commitment in particular.

The spotlight arrived on the market in 2007 after the Citizens’ Advice Bureau made a ’super complaint’ to the Office of Fair Trading (OFT) saying some banks and lenders had been selling over-priced premiums to people who did not fully understand what they were buying. Most of the complaint was centred around how some providers handing out loans would tie protection in with their cash, with some reportedly implying their cover had to be taken out in order for the customer to qualify for the loan they were interested in.

Attention from the media which followed meant some consumers improved their knowledge of the market and became familiar with some of the underhand tactics being used. As a result there has been more interest in shopping around for the right kind of policy. For example, it is not only banks, loan providers and big insurance firms which provide payment insurance. Smaller, independent firms also provide cover, sometimes at much lower prices than more well-known names, with savings of up to 80 per cent up for grabs for certain types of policy.

Besides the conditions mentioned earlier, there will be other caveats on most policies. Most providers will not pay out if you fall foul of a medical condition for which you were treated for during around a year before the policy commenced. People who are in temporary contracts will also not be covered, and those who are sacked or who leave a job voluntarily will also not get a payout.

Most companies also exclude certain medical conditions from being covered. Illness due to stress or back pain will often not make the grade, unless evidence can be obtained from a doctor that the condition prevents the person from working. Sick leave which is triggered by self-harming, a suicide attempt or drug or alcohol abuse is usually not likely to result in a payout. People who end up on a long lay off following surgery which is not medically necessary, such as a cosmetic procedure, will also not usually be covered.

Provided these simple pointers are followed, a payment insurance policy can give peace of mind and a valuable safety net should the unthinkable happen and a person’s income vanishes through no fault of their own. Remember, as with any product or insurance policy, shopping around is the key to securing a good deal.