Insurance: Payment Protection Insurance
Payment Protection Insurance is usually massively overpriced and mis-sold. But cheaper cover is available if you know where to look.
Have you ever taken out a mortgage, personal loan, credit or store card? If you have, it's probable that the salesman, brochure or website 'strongly recommended' that you also buy payment protection insurance (PPI), right? In fact, it's likely that you have a PPI policy and don't realise it, as it is the UK's third-biggest general insurance product for personal customers, after motor and household cover.
However, as with all products that are given the hard sell, with PPI you should be very wary of what you're buying, otherwise you're going to get pillaged. Hence, you will have seen in the press that these plans are under investigation. As The Fool has been raging about the blatant mis-selling of, and overcharging for, this insurance for four years now, it's about time too!
PPI is an optional insurance policy. It's almost always sold to us alongside credit agreements, although there are a few stand-alone (direct) policies available from insurers and brokers. PPI is often called accident, sickness and unemployment cover (ASU), as it protects us from these risks. Borrowers receive monthly benefits if they have an accident, fall ill or lose their jobs. Life insurance to pay off the debt is also included in personal loan and credit card PPI (but not normally in mortgage PPI).
Some other commonly used names for PPI are: mortgage payment protection insurance (MPPI), personal loan protection (PLP) and credit card repayment protection (CCRP).
The thing is, just because insurance can be useful, that doesn't mean the price is worth it. Would you pay £750 per year to insure £45,000 of household contents? Of course not. It would mean that on average the insurer is taking more than four-fifths in profit. That's why you'd pay a much fairer figure closer to, say, £150.
But that's the sort of rip-off people are facing when they buy PPI from a lender, be it a mortgage company, personal-loan provider or credit-card provider. The premium is out of proportion to the risk. It's not unusual for these companies to charge an extortionate £20 or more per month for every £100 of cover.
However, stand-alone providers, such as PayProtect and the Post Office, offer much cheaper cover at around a quarter or a fifth of the price you'll pay through the lender. One of the cheapest on the market is our partner SecurityFirst, which, for a typical 30-year-old, charges just £2.15 per month for every £100 on personal loan protection and £2 on mortgage protection. This means that many providers are charging ten times more than they need to, which is nothing short of disgraceful!
PPI is aggressively sold by lenders too, particularly in that we are normally quoted credit repayments with the protection premiums added, and we then have to opt-out.
By and large, all PPI policies are riddled with small print and exclusions. Being filled with jargon, they are almost incomprehensible to the typical consumer, or even to professionals.
SecurityFirst's PPI also provides 'back to day one' cover, whereas almost all other policies don't pay you anything for the first thirty or sixty days of each claim.
What you should do is reject immediately all insurance offered to you buy lenders. Look elsewhere to protect your payments, either with standalone PPI or with a standard income protection policy which has fewer exclusions.
You should change your existing policies as well. By ditching your existing mortgage PPI, for example, and switching to SecurityFirst you will probably save between £240 and £360 a year. Over the 25-year life of a mortgage, you could save up to £9,000!
Finally, if you don't understand the small print, ask for an explanation!
> Find out more and apply for SecurityFirst's PPI
Published on December 8, 2006
