In the wake of the outcry regarding the mis-selling of Personal Protection Insurance (PPI), this financial product has perhaps undeservedly earned itself a bad name. We put the record straight with information about:
- Why there was a scandal surrounding the mis-selling of PPI
- What Personal Protection Insurance is
- Some common misconceptions about PPI
- Who PPI is suitable for
- Finding the right policy
In this article, we clear up some of the myths and misconceptions about Personal Protection Insurance (PPI). We look at the reasons for the scandal before examining why this financial product still has a place nowadays. From finding the right policy for you to factors to consider, we explain everything you need to know.
Why the scandal surrounding the mis-selling of PPI?
The problem with PPI is not that it was a bad financial product, but because of the circumstances under which it was sold from the 1970s onwards. Sold by lenders alongside consumer credit agreements, the FCA found many of them guilty of mis-selling the product for one or more of the following reasons:
Personal Protection Insurance was sold under questionable terms from the 1970s onwards.
- It was sold without sufficient explanation so customers were unable to make a well-informed decision
- Lenders falsely claimed that its purchase was compulsory
- Lenders sold the product to customers who were not covered by the policy such as the unemployed or self-employed
- Lenders failed to disclose their commission which was often over 50%
What is PPI?
There are three types of PPI policies: Unemployment only, Accident and Sickness (AS) and Accident, Sickness & Unemployment (ASU). Depending on the terms and conditions of the policy, it covers customers for the payment of a loan or credit agreement (such as a mortgage) when they are unable to work because of an illness, accident or redundancy. Unlike other forms of income protection, the money from the policy goes directly towards paying off instalments on a credit agreement. It is not paid out in a lump sum so policy-holders can’t use it for other household-related living expenses.
Some common misconceptions about PPI
Income Protection is unnecessary
Did you know that every year 1 million British workers are unable to work because of an accident or illness? You might think it will never happen to you, but insurance is in place to give you peace of mind for that eventuality.
State aid is sufficient
Many people choose not to take out PPI because they believe that they will be eligible for financial assistance from the government. Although this is true, the current level of Employment & Support Allowance depends on the severity of their illness or disability. However, it averages £70-£100 a week. If something happened to you, would you be able to meet your financial commitments on this income?
Insurers never pay out
According to the ABI (Association of British Insurers), 97% of claims for income protection were approved in 2016. The main reason why claims were rejected was because customers had not made full disclosure (for example, of pre-existing medical conditions) when taking out their policy. If you are interested in income protection and you aren’t sure if information is relevant, always check with your insurer. If not, you could unwittingly invalidate your policy.
Who is PPI suitable for?
Whether to take out PPI depends primarily on your personal circumstances such as whether you have dependents. Also, before taking out a policy, you should contact your employer or the firm’s HR department to see whether you have existing cover as part of your contract or employment benefits package.
The retired, the unemployed, the self-employed (including freelancers) and workers on temporary contracts are all groups which are excluded from taking out PPI. People who can count on their partner’s earnings or family members in case of an inability to work are advised that PPI is not suitable for them either. Also, people who have an emergency fund to cover 3-6 months of living expenses might consider PPI unnecessary as well.
Other factors to consider about PPI
One of the other limitations of PPI is that it will not pay out from your first month of not earning a salary. This waiting period varies from 30 to 180 days though it averages 90 days on most policies. If you want extended cover, this is something you should discuss with your insurer, but it will increase your premiums.
PPI is not the only form of income protection. Depending on your circumstances, STIP (Short-Term Income Protection), Income Protection or Critical Illness cover might be more suitable options for you.
Finding the right policy
Although most credit agreements from car finance to store charge cards offer PPI as part of the package, you’ll find it much cheaper to purchase a stand-alone policy on your own – either from your own insurance provider or from an online search. If you are refused cover (perhaps because of a pre-existing medical condition which makes you high risk), you should contact an independent financial advisor or specialist broker.
Once you have signed the policy, you have a 30-day cooling-off period during which you can cancel the policy. If your circumstances change in any way afterwards, you should contact your insurer to update the policy.
Like most insurance cover, the cost of PPI depends on a number of factors such as your age, marital status, lifestyle, medical history, occupation, etc.
Although switching insurer regularly is recommended so you don’t end up paying the ‘loyalty penalty’, this isn’t true of PPI. If you search around for quotes from rival companies when your policy comes to an end, you might find cover more expensive since your age is a factor which will be taken into account.
Conclusion – Is PPI worth the money?
It seems unfair that PPI has a bad reputation just because of some unscrupulous lenders. As insurance cover, it is no better nor worse than any other insurance policy. The key to purchasing any policy is to be well informed about the benefits and limitations of the cover on offer, and if in doubt, ask your insurer for clarification.