Payment Protection Insurance (PPI) is a type of specialist loan insurance that covers your repayments if you find yourself unable to, through unemployment, illness, accident or other defined circumstances. It is a product that should be seriously considered, especially in today’s uncertain economy.
PPI has caused some controversy in the personal finance markets in recent years due to a variety of factors and this has led to it becoming rather less popular with those taking out new loans.
Firstly, a large number of customers took out PPI in the credit boom years, thinking that it would cover them if they were unable to repay. However, it later turned out that many of them had been ineligible for the insurance from the start.
This was due to factors such as being self employed, or employed only part-time or on a contract basis. Such situations usually render a basic PPI contract invalid due to the elevated risk of such employment: specialist insurances are available for individuals in these circumstances.
Other instances emerged of customers being nominally eligible for PPI and then attempting to claim and finding their applications rejected on spurious grounds. Other customers simply avoided reading the small print of these policies, which invalidated claims made from people who had elected to leave their jobs or been fired from them, as two examples.
Now, an additional factor is making PPI even more unpopular – its cost. Traditionally, these types of insurances are sold with a loan package, at the same time. Hard pressure sales meant that customers were more likely to sign up to them with the loan, believing the insurance to be a linked acceptance factor to receive the loan. A large amount of interest in the media led most consumers to realise that PPI wasn’t linked to acceptance criteria and the message began to filter through that they weren’t tied in to taking insurance from the same institution lending the money.
However, rather than seeking accident, sickness and unemployment insurance elsewhere (an effective substitute for PPI), consumers have largely stopped taking out any kind of insurance against payment defaults.
This is a short-sighted measure, unless consumers have a back-up fund or access to alternative funds if they find themselves out of work and unable to repay their personal loan or credit card. Problems can very suddenly escalate in these circumstances. Without an insurance policy in place, or an alternative to continuing the repayments, the customer may find themselves entering the debt recovery system and being pursued by the courts. This can become very expensive and damaging to the customer’s credit record.
Yes, forgoeing PPI insurance with a loan or credit card will make it cheaper and if the PPI represents a significant amount of the repayment, then it is worth shopping around elsewhere for a better priced policy. It is however, very wise to get another policy in place. These can be arranged through any other financial provider and there are websites where you can search for suitable policies, including moneysupermarket.
As with any insurance policy, you’ll need to be entirely truthful and accurate when building up your personal quote, or a later claim may be invalidated. Make sure you have adequate cover in place, ideally for a year in case you find yourself unemployed for that amount of time. In the current economic climate, it is better to be safe than sorry.
So before you take out any loans or credit cards, make sure you also have adequate provision in place for your repayments and insurance for covering them in the event of an emergency.
This has been a guest post by John C. Get credit counseling and debt consolidation loans.
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