Payment Protection Explained

Although it has often been known as a controversial area of insurance cover, the payment protection insurance market appears ever more relevant and important in times of economic uncertainty. Also known as payment protection insurance, along with some other titles, the product can sometimes cause uncertainty and confusion due to an array of terms. But once the basics are explained, the cover is quite straightforward and can provide some people with a lifeline in times of need.

In its simplest form, a payment protection product covers a person should they suddenly be unable to meet a number of financial commitments due to an unforeseen and unavoidable problem. They are geared to help policyholders keep up payments on bills, mortgages, credit card statements and other debts should they fall ill or be injured and end up unable to work. They will often also cover you if you are made redundant through no fault of your own.

The policies are also designed to fill the gaps left by state support and savings accounts. For example, although many employers offer sick pay to workers who are laid up – the statutory entitlement is currently only 28 weeks, and it is then down to the company what happens next. They may decide to continue paying your wages or could simply stop payment and remain within the law. This could be when many people end up having to turn to state support in the form of incapacity benefit or job seekers’ allowance – highly unlikely to match the regular payment provided by a regular job.

Although many people have some form of savings it will only be a question of time for many people as to how long they last. A serious injury from a car accident or a long lay-off from an illness could see someone dipping heavily into what was supposed to be put aside for a rainy day. It could even wipe out savings completely.

Payment Protection from Burgesses

A payment protection product will help fend off such undesirable situations. Typically a successful claim will mean an insurer gives the customer a regular lump sum to cover the essential outgoings. Often the cash will arrive in a policyholder’s account in the same way wages from a job would, and there are no restrictions on what it can be spent on. In exchange, a policyholder must pay a set premium each month, in a similar manner to many insurance policies.

However, it should be noted that in most cases policies do not pay out for an indefinite period and will expire after a certain amount of time. Also, they will often only start paying out following a set period of time after the initial claim - typically around 30 days.

Anyone looking to cover their ability to keep up with debts in the event of unfortunate circumstances will often also need to decide what percentage of their income they would like an insurer to cover.

Few providers will cover 100 per cent of a person’s regular income – instead it is more likely to be around 50 to 70 per cent. The more a person would like to have covered, the higher the payment protection premium is likely to be.

Payment protection is also just one phrase in a whole host of terms associated with the market. Some phrases apply to essentially the same type of cover, while others have slight differences to the typical payment protection insurance cover. These anomalies have emerged because in some cases an all-round payment protection policy will be too broad for a specific person.

Payment Protection

For certain people a certain payment may be of more concern than others. For example, a mortgage protection policy will cover only the repayments on a home, while loan protection will only cover the payments needed to cover a loan or credit card bill. Redundancy cover can also be added to the list, which is useful specifically for people who fear losing their income through losing their job – note a policy will not cover someone who is sacked.

So why is this area of insurance considered a controversial one and why has it at times attracted negative publicity in the shape of adverse media reports? This all began last year when the Office of Fair Trading (OFT) referred the market to the Competition Commission for an investigation. In the same year the Financial Services Authority (FSA) handed out significant financial penalties to five big names on the high street for mis-selling policies to people who did not need them or did not even properly qualify for income payment protection. The results of a review by the Competition Commission into the market are not expected until 2009.

This does not mean this kind of policy should be avoided or completely disregarded by the average consumer. Instead each person should decide what is right for them and what they definitely do and do not need covering. In uncertain economic times, cover over debts or home loans becomes more relevant. In worst case scenarios, people can end up having homes repossessed or be declared bankrupt if they are unable to keep up with repayments following a loss of income – a PPI policy will give peace of mind against these situations.

The best way to ensure you get a good deal which is suitable for your needs is to shop around a number of providers before deciding on a policy. Some loan or mortgage providers will try to sell cover when also providing a customer with a loan – these policies have been known to be typically poor value.

Instead, try turning to smaller standalone payment protection cover providers who will often offer policies which are much cheaper than bigger names. However, the payment protection market is more simple than many people imagine and can give vital protection against severe financial difficulty should the worst happen. Those who are still unsure could also turn to extra help from the Citizens’ Advice Bureau, which can give advice on how to shop for a policy including how to avoid a poor value or inappropriate deal.