Payment Protection Insurance Explained

Amid an uncertain economic climate, a lot of phrases often get banded back and forth, such as credit crunch, recession and downturn. Another title quite a few people may have heard of is payment protection insurance, although not everyone will fully understand what it is, how it can benefit consumers, and how to get it.

Broadly speaking, payment protection insurance (or PPI for short) is an insurance policy which is designed to protect a person against a sudden loss of pay or wages which occurs through no fault of their own. Many of the circumstances which would see a need for a policy are of a kind a significant number of people believe ‘will never happen to them’. Examples include suffering a sudden and serious injury, perhaps from a car accident, which may require months’ or even years’ of recovery time.

A long-term illness, which requires lengthy treatment and recovery time would also apply, as would the arrival of another economy-related word – redundancy. With times getting tighter, a letter from an employer saying your services are no longer required for financial reasons is more likely.

Although certain illnesses are often age-related, all of the above situations can happen to just about anyone at any time in their life. The result, following the short-term, is no pay. A loss of pay or wages means no income, which in turn means less or no money to pay household bills, mortgage commitments, credit payments, and, perhaps worse of all, no cash for even the basics of everyday life, such as food and fuel.

Thankfully there is always the possibility of a redundancy package should your services no longer be required from an employer. Thankfully the UK state system also includes provision for statutory sick pay, which will run for 28 weeks at the most. After this, there is the possibility of applying for direct support from the government in the form of incapacity benefit, which could be claimed in the event of a disability through illness or accident. Job seeker’s allowance could also be paid by the state, after a detailed application process. However, neither is likely to match the pay packet the average person receives while in a full-time job.

Many other people may have savings in the bank, how much can depend on age, level of pay, and simply how financially aware a person is. It may be a few hundred or thousands, either way this pool is not likely to be limitless and besides, the thought of having to spend a lifetime’s worth of savings on covering a few bills due to being out of work is not a wholly attractive one.

Payment Protection Insurance From Burgesses

Payment protection insurance is designed to protect a person when the worst happens and realistic options have been exhausted. Crucially, it also provides peace of mind in uncertain times.

It should also be mentioned that the phrase itself is often used to cover a number of other types of policy, or in connection with alternative cover options. Typical related phrases include mortgage payment protection, loan payment protection and income payment protection insurance.

So, how does it work? Typically you will decide on an amount of your income you would like to have covered, often worked out as a percentage. Perhaps you feel only a set portion of your income would be needed to cover regular outgoings, or maybe better protection is provided by a policy which covers the bulk of your income – the higher the amount you want to cover, the higher the payment protection insurance premium is likely to be.

Should a policy holder need to make a claim, an insurer will usually pay out an amount of money into a bank account in a very similar way to an employer would if the person was still working – the cash simply pops up in the bank as wages would. There is also typically no requirement on what the money is spent on, in a manner similar to having a job – only the policyholder decides what to do with the money.

Payment Protection Insurance

However, a generic payment protection insurance policy is very general. Although this can be useful in that it covers a multitude of eventualities and payments, for some people it will simply be too wide-ranging, or when bought from a high street bank or lender, too expensive. Some people will be more worried about covering certain outgoings than others – there may be a particular living cost or loan repayment which is more important than everything else. Some common variations of payment protection insurance provide for these needs.

For example, mortgage payment protection insurance takes care of the type of payment which concerns many people – the loan which provides the roof over their heads. This type of cover is usually calculated by adding together the cost of the repayments themselves and the cost of buildings and contents cover.

Another regular variation is loan payment protection insurance, which will give peace of mind on the payments someone makes on a loan they have taken out. If losing your job is of particular concern, then a specialist redundancy insurance package will cover this.

However, it is important to shop around for cover once deciding it is needed. It should also be taken into account that the payment protection insurance industry has been under scrutiny. In 2007 the Financial Services Authority (FSA) fined a number of big high street names for mis-selling policies to people who did not really need them.

What should also be noted is that loan and mortgage providers will often try to sell their own brands of cover when providing the money – these can sometimes be poor value. Instead, try checking out standalone providers, which can offer policies up to 80 per cent cheaper depending on what kind of payment needs to be covered.

So, remember payment protection insurance is not as confusing a topic as it can at first seem. In more difficult times the cover can provide a lifeline, but, as with most types of insurance, deals vary widely and the smart consumer should shop around for a top deal on peace of mind.