What Is PPI?

Payment protection insurance (PPI) is designed to cover repayments on a mortgage, loan, credit card or other borrowing in the event of loss of earnings. It is sometimes known as accident, sickness and unemployment insurance. An estimated 35 million PPI policies have been sold in the UK.

The central premise behind the insurance is that if you were to have to cease work, you could make a claim on your PPI and have your monthly repayments made for 12 months, or until you return to work, whichever comes earlier.

PPI mis-sold

The central premise behind the insurance is that if you were to have to cease work, you could make a claim on your PPI and have your monthly repayments made for 12 months, or until you return to work, whichever comes earlier.

The two main problems with past PPI policies are the design of the product and the practices used by banks and other companies who sold it.

Many PPI policies were not designed with the customer's interests in mind. Firstly, it could be very expensive. Even if you received benefits for 12 months, the amount paid out may well have been less than the price of the insurance. Most PPI policies have lots of exclusions, such as being unable to claim for stress or back conditions, or the self-employed not being covered for unemployment.

Furthermore, large numbers of PPI policies were single premium, with the premium added to the loan amount. The insurance term was typically three to five years, yet the insurance premium, plus often large amounts of interest, was repaid over the full term of the loan ñ perhaps 25 years for certain loan types. Customers seeking to cancel single premium PPI early found they would still need to continue paying interest on the premium.

PPI - A Profitable Product

PPI was a profitable product for financial institutions. Hence their salespeople were offered significant incentives to sell it. Many borrowers have reported feeling unduly pressured into buying PPI. Others allege that they were told the insurance was compulsory, or that taking it would improve their chances of being accepted for the loan. Some PPI salespeople automatically quoted a loan repayment amount that included the cost of PPI, and the customer had to actively opt-out of the insurance. Often a PPI sale would conclude without the salesperson explaining the exclusions on the policy, or that the plan was single premium.

Did you know you can still get PPI?

PPI can still be purchased today though. If you were to cease employment unexpectedly, without any insurance, meeting your loan repayments could be a major source of worry. There are a number of PPI plans offered today which are very different from those mis-sold over the past decade.

Following the intervention of the Competition Commission in 2009, loan providers are prohibited from offering PPI at the same time as the loan. They may attempt to do this later, but even if they do, you can still shop around for your insurance

A visit to an insurance price comparison site will reveal several insurers offering PPI. These insurers will generally offer cover that is much cheaper than the typical lender PPI policy of the past, and all insurers will now offer their PPI as a regular monthly premium. Standalone PPI existed throughout the mis-selling scandal, but many borrowers did not know of its existence and automatically purchased the lender's insurance.

Before making any decision to purchase PPI, please look carefully at:

• Whether you already have adequate existing insurance
• The exclusions on the policy, particularly with regard to stress, back complaints and pre-existing medical conditions
• The extent of the unemployment cover: is there any cover for the self-employed or contract workers?

If in doubt, seek independent financial advice.

All information presented in this article is accurate as of February 2013