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MONEY COMMENT
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This morning I received two separate bank leaflets in the post - one suggesting that I could 'enjoy more financial freedom' by taking out a personal loan (secured on my home) and the other offering me a credit card with a pre-approved credit limit of £4,000. How kind of them to offer! Both leaflets included details of how I could buy payment protection insurance (PPI) to ensure I could make my monthly repayments if I got sick or made redundant, or pay them back in full if I dropped dead. Lenders are extremely keen to sell this cover as it's one of the most profitable financial products around. According to my colleague, TMFCliff, who worked in this industry for many years, insurers price it to provide a profit margin of around 80%, most of which ends up as commission paid to lenders. In other words, it's often five times more expensive than it needs to be, not to mention the fact that the small print of these policies is usually peppered with various exclusions and get-out clauses. The fact is you are paying your insurance premiums to the bank to protect them against you being unable to repay the loan. So whilst it may be great for them, it's not necessarily in your own interests. If you're taking out a loan that is secured against your home then some form of payment protection may be worth thinking about if you have no other form of insurance against loss of income. After all, you don't want to risk losing your home. But many loans are unsecured and you often find that when you read the small print PPI payment is deferred for a period of, say, one or two months and that it will only pay out for, say, a year if you are unable to work. And your borrowings are only likely to be paid off if you actually drop dead - and even then there are limits! Your best bet would be to have a 'catch-all' income protection policy, which would be much better value than taking out individual policies for many forms of borrowing. That way all your bills would be paid rather than just one of them. Some savings to cover your monthly payments for the period during which they won't pay out would also be sensible – you could put by the insurance premiums you've saved for a start! Find out more about The Perils Of Payment Protection Insurance.