Payment Protection Plan Explained

Many of us already have a number of safety nets in place to protect us from the unwanted and unexpected. If you drive a car, you will have a motor insurance policy in place. Homeowners rely on some form of cover for their possessions against threats such as fire or theft. Some even take out cover on their pets in case they incur heavy fees at the vets. All of these are sometimes referred to as plans, such as home protection plans. A payment protection plan protects the policyholder against the unexpected hazard of having their regular income suddenly taken away from them through no fault of their own.

A loss of pay, through incidents such injury from an accident, long-term sickness or involuntary redundancy, would have quick consequences for many people. Although statutory sick pay and benefits can provide some support, neither are likely to provide enough respite for those who face a long period on the sidelines.

If savings are low or non-existent, red bills will soon begin to arrive on the doormat and credit card statements may go unpaid. Worse still, mortgage payments could go unmet, which over time could even lead to repossession.

Payment Protection Plan from Burgesses

A payment protection plan is designed to guard against these worst-case scenarios. At best they will help a policy holder keep their home when times are hard, and at worst they will guarantee peace of mind in exchange for a regular premium. However the term itself could be applied to the many forms of payment protection insurance. Although there are a multitude of terms associated with the market, some are very similar while others have subtle differences. For example, mortgage payment protection insurance specifically covers home repayments, while loan payment protection will cover the commitments on a particular loan. The term PPI is also often used as an abbreviation, while income payment protection insurance is another common name for payment protection plans.

So, how does a plan work? A would-be policy holder must first decide how much of their regular income they want to be covered. Few providers will offer protection for 100 per cent of regular payments – the choices are usually between 50 and 70 per cent. The key here is to work out what debt or outgoings would cause you the most problems should you be suddenly unable to pay them. Maybe it’s just the mortgage you are most concerned about – if so a mortgage payment protection policy could be the most appropriate, or maybe you have a large bank loan, perhaps needing a loan protection policy.

However, if two or three outgoings need cover, a general plan will be needed. Sit down and add up exactly what goes out each month on what and add up the total. If necessary take away one or two standing orders or similar on which you have no debt-related commitment. Think about what you could do without each month and what could be cancelled in an emergency – do you really need the satellite television subscription and would you be able to release yourself from it if necessary. After all these ‘avoidables’ are removed you should have a sum close to what you need covered.

Payment Protection Plan

When hunting for a policy, bear in mind providers require policy holders to meet certain criteria. You will usually need to be between 18 and 65 years of age, be a permanent UK resident, and have been working for a set number of hours a week for a set period of time. If you are concerned about being made redundant, ensure you have been given no indication by your employer that your services are likely to be cast aside – this could invalidate some policies.

All providers charge a regular monthly premium, and will often run a delay between a successful claim and a first payout, usually of around a month, though some providers back date their cover to the first day of the claim. Besides this, a policy will pay out cash almost exactly as an employer would. The amount will arrive in your bank account in exactly the same way and there will be no limitations on exactly what it is spent on. Crucially, it will also be tax free.

Before embarking on a search for policy, you should also bear in mind that the payment protection market is a sector under scrutiny from industry watchdogs. Last year the Competition Commission launched an investigation into providers after some were found to have been mis-selling policies to consumers. Most of the allegations have been laid at the feet of providers who allegedly pressured consumers into taking out expensive policies when offering them loans. In some cases people who did not even qualify for protection where sold cover. The commission’s investigation is expected to be complete next year.

Besides loan providers and well-known insurance firms, there are also some excellent standalone companies which specialise in providing payment protection plans. These are often better value than their more famous cousins, with some policies as much as 80 per cent cheaper, so as with any form of cover, it pays to shop around thoroughly.

Although many people will have thought about protecting their ability to keep up with outgoings, research shows that very few actually have policies in place. Only around a quarter of people have some kind of payment or unemployment cover. With UK economic growth slowing and wages stagnant, it becomes more important to have some form of safety net in place.

State benefits for the unemployed and incapacitated, while provided by a well-organised system, are highly unlikely to cover all the commitments of the average person. At the time of writing, for example, job seekers can expect a maximum of around £60 per week from the government, after a lengthy application process – barely enough to cover food and other essentials such as petrol. Redundancy packages and sick pay also have their limits, so in times of need a payment protection plan could provide the difference between managing the bills and catastrophe. Just be sure to shop around for the best deal.