PPI Explained

With inflation on the rise, redundancies in the news and credit harder to come by, the average person can’t help but wonder what they would do to keep up with regular financial commitments. Mortgages still have to be paid, bills have to be sorted and the credit card statement can’t be ignored. Payment protection insurance, or PPI, aims to ease these worries and give a policyholder a safety net in times of need.

PPI is an abbreviation often attached to a whole market of insurance cover aimed at helping those who fall foul of illness, injury or redundancy through no fault of their own. It is used as a general term both by consumers and providers and is something of an umbrella phrase for product titles such as mortgage payment protection insurance, loan payment protection insurance, payment protection and redundancy insurance, among other variations. Note that some forms of payment insurance are geared specifically to cover one kind of commitment while others are more general.

PPI from Burgesses

Such policies are popular because they provide something of a lifeline should the worst happen. Imagine being unable to work through for example, a long illness which will need months or years of treatment. An accident such as a car collision can also see someone out of action and recovering from injury, while others are simply made redundant with very little warning. No work means no pay, and no pay means no income, without which bills and other commitments cannot be paid.

UK employers have to provide statutory sick pay to workers – which currently stretches to a maximum of 28 weeks, with anything beyond that down to company discretion. Beyond that savings will probably have to be used to keep red bills from the letter box. PPI is designed to save the worry of what happens when such provisions run out. Upon making a claim which is successful, the policyholder will get a tax-free lump sum paid into their account from their insurer in the same way they would from an employer. There will usually be no requirements as to what this money is spent on, so you will be free to spread it across bills and other essential earnings as you see fit – potentially even staving off the repossession of your home.

Of course, policies do not pay out indefinitely. Most will only provide sums for set periods of anything from around six months to one year, and 100 per cent of your income will not be covered – you must choose between around 50 and 80 per cent, with premiums increasing or decreasing accordingly. Most insurers will also need you to meet a number of qualification requirements related to aged and circumstances. Typically you will need to be between 18 and 65 years old and be working for a certain number of hours a week.

PPI

Firms also put some restrictions on for what reasons a person can make a successful claim. For example someone making a claim who has known for some time they would be getting their notice is unlikely to be covered against such an eventuality. Likewise, not all injuries will be catered for. Providers do not tend to pay out to people who are out of work due to stress or back pain unless strong medical evidence is provided to support the idea they are unable to work. Those who are off sick due to drug or alcohol problems are also unlikely to get payment, as are those who are laid up due to injuries caused by self harm.

These conditions, however, are no more stringent than those imposed on many types of insurance policy.

That said, the sector has been under heavy scrutiny from watchdogs and the media in recent years. As a result the term payment protection could ring one or two alarm bells in the heads of some consumers. The Competition Commission is currently looking into the market following complaints last year that some firms were mis-selling policies, including giving cover to some consumers who did not qualify for or need it.

Although the investigation is still ongoing, the Commission has already found consumers are sometimes overcharged for cover. In provisional findings, the group ruled too many people are unaware of how wide the PPI market is and end up taking out a policy from the same firm offering them a loan or other type of credit, sometimes at poor value. Some of the measures being considered to tackle this include a possible banning of the sale of cover at the point of taking out a loan.

A key feature of the initial findings was the fact that some people remain unaware of standalone providers who specialise in PPI cover and are not connected with offering policies at point of sale. Although they are less well-known than the brand of high street lenders, they can often offer a better deal, with some payment protection plans as much as 80 per cent cheaper when provided by smaller firms.

The key when shopping in the payment protection market is to not be intimidated by the combination of bad press and multitude of terms. The basic principle for policies remains the same throughout, and the only real difference lies with specialist policies which are designed to cover certain debts in certain sets of circumstances.

Another important thing to bear in mind is that a PPI policy is a lot more important than some people think. Savings, if a person even has them, are not likely to go far and in most cases are there for a rainy day – not for shelling out on the mortgage after being put out of action following an accident. Just falling a little behind with certain payments can also mean a bad credit rating which can go against a person’s ability to get finance in future. For what can be a very modest premium each month, the peace of mind brought by a payment protection policy could make all the difference to an individual in face of a wide spread economic slowdown.