Insurance World

Payment protection insurance (PPI) has taken a bashing recently. PPI is a type of insurance designed to protect repayments on financial products if borrowers find that they are in financial difficulty.

PPI has been examined by the Financial Services Authority, criticised by Which? and is now under investigation by the Office of Fair Trading. Most of these organisations are concerned about protecting consumers’ rights. They are worried about:

· whether consumers are sufficiently well informed at point of sale to make decisions about whether to have PPI
· the wide variation in the cost of PPI policies
· the huge profits made by lenders offering PPI because of the relatively few claims made by borrowers
· and the lack of PPI providers who are not linked to banks or other lenders.

Given these concerns, it’s a good time to find out more about whether PPI is really the right choice for borrowers.

Why Have PPI?

It’s difficult for borrowers to know how their financial circumstances are going to change. When they are taking out a mortgage, loan, credit card, store card or other financial product, the sales person often offers PPI. The reasons why it might be a good idea are:

· if someone becomes unemployed or is made redundant
· if a long term illness prevents someone from working
· if someone is injured and is unable to work

All of these circumstances mean that borrowers might not be able to meet the repayments on the mortgage, loan, credit card or store card. This could result in arrears, defaults, County Court Judgements (CCJs) and, depending on the type of loan product, the loss of their home. Payment protection insurance is designed to make sure that repayments are met, avoiding this sticky financial situation.

Inside PPI

PPI is available to most people aged 18 to 65 who are employed for at least 16 hours a week or have been self-employed for a long period. Once borrowers have signed up for the insurance, they have to wait a certain period before making a claim. This is usually 60 to 120 days. Once they do make a claim and have it accepted, their payments can be covered for a period of 12 months or more, depending on the policy.

One key thing that borrowers should be aware of is that the sellers of some financial products add the cost of the PPI policy to the credit being offered. This means that borrowers can end up paying interest on the insurance policy. This is one of the many reasons that PPI selling has been criticised. Borrowers should also look into the cost of the insurance, as this varies widely.

Beyond PPI

Many borrowers do not realise that they do not have to take out PPI at the time of buying a financial product and the people who are selling PPI often do not make this clear. There are some stand alone PPI providers who may provide a better choice. Borrowers who repay loans from earnings should also consider an income protection policy, which will protect most of their income rather than individual financial products.

If you’re in the unfortunate position of having to make a claim on your critical illness insurance policy, the last thing you want is insensitive hassle or apparent non co-operation from your insurer. But according to numerous newspaper articles, that’s precisely what’s happening. The core problem is that before they’ll pay out, the insurer will always want to make exhaustive enquiries about your past health record. Whilst you’ll have provided them with lots of similar information when you initially applied for the cover, the insurers will now insist that all the information is rechecked. And if at the time you said you weren’t a smoker, they’ll now want this verified by your doctor.

The reasons are obvious. They’re faced with a big claim, typically way over Ј100,00, and they want to be certain that you told them the entire truth about your health when you first applied. This means that now you’ve claimed, they’ll crawl over your medical records in great detail checking that you disclosed everything on your application. Every small and apparently insignificant detail will be subject to intense scrutiny. The problem is that their reams of correspondence can be quite upsetting for you.

The insurers defend their procedures saying that they need to be certain that when they accepted the business, you disclosed the full truth about the factors affecting your health. They want to be sure that you didn’t cheat by omitting some information in order to dupe the company into issuing a policy when they otherwise might not, or to help you qualify for a lower premium. Either way, non-disclosure as they call it, is cheating and a valid reason for them refusing your claim. It doesn’t even matter if the information you omitted ultimately had nothing to do with the illness that occasioned the claim. The insurers position is that every piece of information you provide was used to work out your premium and any omission affects the calculation.

The insurers are particularly distrustful if the claim arrives within the policy’s first five years. Any claim arising during this period is classed as an “early claim” and the insurers are particularly watchful for policyholders who took out the critical illness insurance already suspecting that that they were already ill.

The problem is that all this intense scrutiny attracts a very bad press. If you’re very sick and distressed, the last thing you want is lots’ of questions and high-handed hassle from your insurer.

There’s undoubtedly a conflict here. If they are to neutralise the bad press, the insurance companies need to work much harder at softening the enquiry process and they must liase much more closely with their claimants. Insurers must present a much softer centre at what is a most distressing time for their claimants.

All this adverse PR has had two effects on the critical illness insurance market. Applicants have apparently been favouring insurers who publish the lowest rejection rates and others have withdrawn from making any application.

In practice, avoiding insurers who publish high refusal rates has little benefit. That’s because the published figures can be misleading. The latest figures show that Scottish Equitable Protect has refused to pay out on 28% of critical illness claims followed closely by Friends Provident at 25%. If you compare these figures with Scottish Provident at 13.7%, many potential policyholders can be forgiven for favouring Scottish Provident. But that’s not necessarily the best decision.

The problem with interpreting these figures is that the figures themselves can be distorted by how long the insurer has been active in the critical illness market. As rejection rates are highest with policies that have only run for a few years, then companies that are new to the critical illness market will automatically have the highest rejection rates. This leaves companies such as Guardian Financial Services looking good with a rejection rate of just 10%. The truth is that the Guardian has been in the market for over 15 years and has a mature book of business.

And it’s a pity that all this negative publicity has undermined confidence in critical illness insurance. In our view, this insurance plays an important part in protecting family finances but people are being deterred from buying it, leaving their family unit exposed if they become seriously ill. After all, if the main income provider is taken seriously ill, the family’s income can plummet. That means that the tax-free lump sum paid out by these policies can become central to the family’s financial survival.

Our advice is if you think you need critical illness cover press on. But be aware that these policies vary a lot in the cover they offer - so straight price comparisons aren’t really meaningful. Basic plans will cover one or more of the most serious conditions but comprehensive plans cover many more – for example:

Alzheimer’s disease
Aorta graft surgery
Aplastic anaemia
Bacterial Meningitis
Benign brain tumour
Blindness
Cancer
Cardiomyopathy
Chronic lung disease
Coma
Coronary artery by-pass surgery
Creutzfeldt-Jakob disease
Deafness
Dementia
Heart attack
Heart valve replacement or repair
HIV or AIDs from an assault, blood transfusion, occupational duties or accident
Keyhole heart surgery
Kidney failure
Loss of independent existence
Loss of limbs
Loss of speech
Major organ transplant
Motor Neurone disease
Multiple Sclerosis
Paralysis/Paraplegia
Parkinson’s disease
Progressive Supranulcear Palsy
Stroke
Third degree burns
Total and Permanent Disability
Cover for children

This complexity means that you really need independent advice. There are plenty of web sites that can help you. Just search for “critical illness insurance” and make sure you can talk to an adviser before you buy.