Summary

Payment Protection Insurance has been getting a hammering in the press lately. Why and is PPI a good idea? This article investigates.

Payment Protection Insurance Whats all the fuss about?

Author: Michael Challiner (cheap car insurance)

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In recent months youll have seen lots of comment in the UK press about the evils of Payment Protection Insurance. In our view, the problem is not so much ( life insurance ) about what the insurance does, but more about how its sold.

Payment Protection Insurance protects borrowers who fear theyd be unable to maintain their debt repayments if they lost their income due to illness, accident or unemployment. ( personal loans ) The basic idea of the insurance is sound but the problem is that to make a valid claim, you have to satisfy certain criteria and quite a few people fail to do this. For example, if your job is seasonal or casual, or your illness was due to back pain, you wont be able to claim. In fact only 4% of policyholders make a claim and one in six of claims are rejected. (health insurance)

However, the worst aspect is that lenders have clearly pressurised some ( travel insurance ) people into buying Payment Protection Insurance when they really didnt need it - either because their employer will continue to pay them if theyre off ill or they already have other types of insurance that provide similar benefits or the nature of their employment would disqualify them from claiming. Indeed, according to Defaqto the financial researcher, 60% of online credit card companies and 30% of loan providers fail to show you the terms and conditions for the insurance before signing you up. Its these terms and conditions that tell you when you cant claim.

Only a few months ago FSAs published the results of its mystery ( home insurance quotes ) shopper investigation into Payment Protection Insurance. This concluded that around half of the lenders shopped failed to explain the details and exclusions to customers or ensure the insurance was suitable for their clients. Whilst the investigation didnt conclude that lenders were compulsorily selling PPI, they found it was frequently added to loan quotations without it being explained that the insurance was optional.

And even worse in our view, many lenders do not explain the full cost of the insurance. In many cases the full cost of the insurance (for the entire period of the loan), was being added to the loan as a lump sum at the outset rather than being paid as a monthly premium. This effectively means that the borrower cannot cancel the insurance without paying off the entire loan - and interest is charged on the insurance premium! (cheap loans)

Now after months of deliberation the Financial Services Authority (FSA) has at last shown its teeth. Its told Banks, Building Societies and other lenders that they could be forced to cease selling Payment Protection Insurance alongside loans and mortgages if they fail to clean up their act.

In a confidential letter sent to the Council of Mortgage Lenders leaked to the National Press, the FSA threatens to bring in "corrective actions" if Payment Protection Insurance continues to be miss-sold. The memo goes on to indicate that the FSA would prefer the lenders to put themselves in-order, but if necessary, the FSA threatens action. Its most likely directive would be that sales PPI must be made quite separately to the sale of the loan or credit facility. This will clearly hit lenders profits as last year alone they earned over £1 billion, yes BILLION, in profits from Payment Protection Insurance.

Over the years lenders have certainly honed their ability to charge for PPI. Only a few months ago we came across a high street bank that charged £5,150 for PPI to cover a loan of £16,000. They then added the cost of the insurance to the loan increasing the amount borrowed to £21,150. This meant that of the £300 monthly repayment, about £70 represented the cost of the insurance. What the lender never told the borrower was that equivalent insurance could be bought on the Internet for around £20 per month and the insurance from the Internet was cancellable at any time without penalty. (car insurance quotes)

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