Insurance World

Almost every time you try to buy a financial product someone tries to sell you an add-on. It doesn’t seem to matter whether you are signing up for a mortgage, loan, credit card or store card. Most lenders try to get borrowers to sign up for payment protection insurance but do they really need it? Here is what you need to know about payment protection insurance.

What Is Payment Protection Insurance?

Payment protection insurance (PPI) is a form of insurance to make sure that borrowers can keep up repayments on mortgages, loans, credit card, store cards and other financial products if they face financial hardship.

Why Would I Need PPI?

1. If they have an accident that prevents them from working
2. If there is an illness that prevents them from working and earning
3. If they are made redundant or become unemployed

Any or all of these situations could make it difficult to keep up repayments. Payment protection insurance could cover repayments for up to 12 months in these cases, depending on the policy taken out.

People in the UK are borrowing more and saving less and redundancies are often in the news. It takes longer and longer to qualify for state benefits, so without some form of insurance people might end up in court and might even lose their homes if they were unable to keep up repayments for long periods. These are many of the reasons that sales people use to persuade borrowers to get PPI.

It is worth noting that most policies have exclusions relating to medical conditions and drug and alcohol abuse. There is also usually a period of 60 to 120 days after taking out the policy during which time borrowers cannot make a claim.

What To Look For With PPI

Payment protection insurance has often been slated for being unfair to consumers and there are some issues that borrowers should pay attention to. For example, it is worth checking whether the cost of the insurance will be added to the amount borrowed. This would mean that you pay interest on the insurance as well.

It is also worth paying attention to the actual cost of the insurance. This can vary quite widely, so borrowers should look beyond the low interest rate on a loan or credit card to see what the total cost of borrowing will be.

Alternatives To PPI

Although PPI has been criticised for being no more than a money-making scheme for lenders (it is currently under investigation by the Office of Fair Trading), there are very good reasons to take out some form of insurance against ill health, accident or unemployment.

What most borrowers don’t know is that they can take out separate insurance policies which will cover not just the particular financial product, but a substantial part of their income. This type of income protection policy may be a better bet if you usually make debt repayments from your earnings.

When you take out a loan, it is likely that you will be offered loan insurance to protect your payments should you be unable to keep up with them due to illness or unemployment. However, many of the loan insurance policies on offer cover you for very little and are extremely expensive. If you want to find out what you should be paying for loan insurance and what to avoid then this article can help you to decide.

What is loan insurance?

Loan insurance is often known as payment protection insurance or PPI. This type of insurance covers you if you cannot make your loan payments because of an accident, illness or involuntary unemployment.

How much does it cost?

The price of loan insurance can vary greatly, but is usually added as an extra to your payments each month. Although the payment figure might look small, if you add it to the total loan amount and then add interest the number can seem much more.

Hidden costs

Although a loan might seem cheap, when payment protection is added the loan price can increase significantly. For instance, the amount you pay back on a Ј5000 loan over 5 years can increase by over Ј1,500 when loan insurance is added. Often, loan insurance is added without you knowing about it, which means you are paying for something you didn’t even ask for.

The benefits

Despite its high cost, there are some benefits to loan insurance. It can give you the peace of mind that if something should happen to you then your payments are covered for up to a year. This means that you won’t be in financial difficulty or risk default if you are ill or injured. If this sort of security is important to you then loan insurance is probably a good idea.

Lack of cover

Although it can give you peace of mind that you will be covered, loan insurance has extremely limited coverage. For example, if you are self employed it is unlikely that the unemployment clauses will cover you unless your business has ceased trading. Before getting any loan insurance you should check that you are covered for the things that are important to you, otherwise the policy is not worthwhile.

Alternatives

There are some alternatives to loan insurance that are usually cheaper. Firstly, you can usually get the same sort of loan insurance cover independently from your loan provider. The price of this insurance is usually much lower than the price offered by your insurance company. Also, some of the clauses of the loan insurance may already be covered under other insurance policies that you have. Loan insurance can be worthwhile, but unless you are covered and can get the insurance for a good price then it is usually not worth having. However, if you shop around and know exactly what you need to be covered for, you can find insurance that will cover you in the event that you cannot keep up with your loan repayments.