What is Payment Protection Insurance
When you take out a large loan or a mortgage, you may worry about how you're going to pay it back if you stop being able to earn money.
You can take out insurance to cover the loan repayments if something like this happens. This is called Payment Protection Insurance or PPI.
PPI can cover your loan repayments if you have to stop work because of illness, an accident, you become disabled or you lose your job. Most policies also include a life benefit which will pay off the outstanding balance on a loan or card if you die.
You can get PPI to cover loans such as repayment of car finance, personal loans, credit and store cards, catalogue payments and mortgages.
Very often, you can get PPI at the same time as you take out a loan. But you should stop and think about whether you really need it before you agree to take it out. PPI can be very expensive and it may not be suitable for you or you may have other ways to cover the repayments if you need to.
PPI can be added onto the loan repayments so you might not even realise you're getting it. The lender is supposed to tell you if the loan includes PPI and explain how much extra it will cost you, but this doesn't always happen.
When you take out a loan, check if it includes PPI and how much extra this is going to cost. If it includes PPI, you should check the terms and conditions of the policy very carefully. There will often be lots of exclusions, which means there may be lots of circumstances where you won't be covered if you want to make a claim. Some common exclusions are if you are self-employed, dismissed from your job or suffer from mental health or back problems.
You don’t have to take out PPI when you take out a loan. However, some lenders won’t agree to give you a loan unless you take it out. There’s nothing to stop them from doing this, but if you don’t want PPI, it might be better to go to a different lender.
If you do decide you want to take out PPI, you don't have to take out the policy your lender is offering. It might be better to shop around until you find the right deal.
If you take out the policy your lender is offering, your contract for the insurance will be with a separate insurance company, not with the lender. If you need to make a claim on the policy, you will need to do this through the insurance company.
If you take out a loan without realising that it includes PPI or the policy turns out not to be suitable, you may be able to make a claim against the lender for mis-selling you the policy. If your claim is successful, you will get a refund.
Do you need Payment Protection Insurance
If you're thinking about taking out Payment Protection Insurance (PPI) or you're offered it when you take out a loan, you should think very carefully about whether you really need it.
This is because PPI can be very expensive and it may not be suitable for you or you may have other ways to cover the loan repayments if you need to.
Check whether you already have insurance or other benefits which will cover the loan or credit repayments if your circumstances change. For example, you might have:
- life insurance
- another illness insurance policy such as critical illness insurance or income protection insurance
- sickness or redundancy benefits offered through your employment contract which would be enough to cover the loan repayments
- insurance combined with your mortgage.
Some PPI policies will actually give you reduced payments if you already have an insurance policy which protects you against illness. If this is the case, it may not be worth taking out PPI.
Most types of illness insurance won't cover you for unemployment as well, so if you want cover for this, you might still want to think about PPI, even if you have another policy. However, bear in mind that PPI doesn't cover you for all types of unemployment. For example, many policies don't cover you if you've been dismissed or you're self-employed.
You might want to think about whether you have any savings you can use instead of insurance to cover the loan. However, bear in mind that you may not be able to save enough to cover a long period of ill-health or unemployment. And you may face another emergency, which would use up your savings and leave you without any cover.
If you don't have any other way of covering the loan, you may be able to buy a stand-alone policy. This is sometimes called accident, sickness and unemployment (ASU) cover. You can usually buy this type of policy through an insurance broker or a company selling on the internet or over the phone.
For more information about other illness insurance policies, see Insurance.
Things to think about before you buy Payment Protection Insurance
You should think very carefully before you agree to buy Payment Protection Insurance (PPI).
You should always make sure you get a copy of the policy or a policy summary and that you check this carefully to make sure it’s going to cover your circumstances if you ever need to make a claim. If you have any doubts at all about this, contact the insurance company and ask them to make things clear. If there are circumstances in which you won’t be covered, the insurance company must tell you about them.
Here are some questions to think about:
How much will the policy cost
The cost of PPI can be high. It can add a significant amount to your loan. You should always shop around to make sure you're getting the best deal and a policy which will meet your needs if you make a claim.
When you’re comparing the cost of loans, make sure you compare loans of the same amount over the same period of time.
Ask the lender to give you quotes for the loan with and without PPI, so that you know exactly how much the loan costs, how much the PPI costs and you can compare these costs with other loans and policies.
If the lender won't do this, it's probably best to think about using a different lender.
You may be asked either to pay the full cost up-front or spread it out in monthly payments. These are called premiums. If you add the up-front cost to your loan, you will be charged interest on it too. Paying regular premiums may work out cheaper.
If you're taking out an unsecured loan, you shouldn't be asked to pay the full cost of a PPI policy up-front. An unsecured loan is one where your home isn't put at risk if you fall behind with the payments.
If you are going to pay by monthly premiums, you should also check whether the insurer has the right to increase the monthly costs or reduce the level of cover once you have taken out the policy. Some insurers can do this if they give you enough notice.
If you don’t like the idea of them being able to do this, it might be best to choose another insurer, or think again about whether you really need PPI at all.
How long does the policy pay out for?
PPI usually only covers the loan or credit repayments for a limited period of time, often twelve months. However, some policies will pay out for longer and up to two years.
The amount of cover you get can depend on the type of insurance you have:
- mortgage and loan payments are usually covered in full for the set period of time for which you are insured
- with credit and store card payment protection, you are often only covered for the interest on the outstanding amount you owe, or the minimum payment. This means that you may not be able to clear the debt during the period you’re claiming and will still have to find a way to pay it off when the insurance runs out.
Many PPI policies pay out in blocks of 30 days. This means that if you returned to work after 28 days, you wouldn’t get a payment.
There is usually a 30-day delay, or waiting period, before you can make a claim.
If you continue to use a credit or store card while claiming on your insurance, the insurance won’t cover the new payments you've made.
Are there any age restrictions?
PPI policies don’t normally cover you once you reach retirement age.
Will you be covered for unemployment?
PPI will only cover you for unemployment under certain circumstances.
You must normally be in permanent, full-time employment. This usually means you have to work at least 16 hours or more a week. If you’re on a temporary contract, the policy may not cover you.
If you work full-time, but for a number of different employers, you may not be covered. You may not be covered if you work for the same employer, but on a contract basis. Make sure the insurance company knows the exact details of your working arrangements before you take out PPI.
Many PPI policies don’t cover you if you’re self-employed. Policies which do cover self-employed people often have lots of restrictions. For example, they might only cover you if you have to stop work because of ill-health or if you die or have an accident, not if you’ve run out of work. If you’re self-employed, you should check the details of a PPI policy very carefully before taking it out.
Some policies won't cover you if you're dismissed from your job for misconduct or some other reason. Also, you may not be covered if you take voluntary redundancy, or leave your job simply because you don't like it there.
For help to find out whether you’re employed or self-employed, see Contracts of employment.
For more information about dismissal, see Dismissal.
Will you be covered for sickness?
Many PPI policies won’t cover you for certain illness. For example, policies don’t usually cover conditions which have anything to do with pregnancy, drugs or alcohol. A policy might not cover mental illness or back problems.
A policy shouldn’t discriminate against you if you’re disabled. If you think a policy discriminates against disabled people, you should get advice.
Most PPI policies won't cover you for any illness which you've already had when you take out the policy. This is called a pre-existing condition. Also, a policy may not pay out if you didn't tell the insurance company about a medical condition you've had in the past.
Before you take out PPI, you must give your insurer full details of you and your family’s medical history. If you already have a medical condition, look for an insurer that will be prepared to cover it, although you may have to pay more to take out the policy.
You don’t have to discuss personal or sensitive information with the person who sells you the policy. You can ask to send the information directly to the insurer’s medical officer.
Where to buy Payment Protection Insurance
You are often offered Payment Protection Insurance (PPI) when you take out a mortgage, store or credit card, or personal loan. Sometimes the lender won’t agree to give you credit or a loan unless you take out PPI. However, you don't have to take out the policy your lender is offering. It might be better to shop around until you find a deal at the best price which meets your needs.
You can buy other Payment Protection Insurance policies from:
- an insurance company or broker
- an internet comparison website.
Cancelling a Payment Protection Insurance policy
You have the right to cancel a Payment Protection Insurance (PPI) policy within 30 days. Some policies will give you longer than this to cancel. If this is the case, the person selling you the policy must tell you what the cancellation period is. You should get a refund of your premium, if you’ve paid it. Sometimes, an amount can be deducted for costs, or because you’ve been covered by the policy for a period of time. However, an insurance company isn’t allowed to charge you a penalty for cancelling.
If you pay monthly premiums for your PPI, you can usually cancel at any time, although you may need to give a period of notice.
You may also be able to cancel a PPI policy due to mis-selling.
Complaints about Payment Protection Insurance
If you have problems claiming on a Payment Protection Insurance (PPI), this could be because you were sold a policy which was wrong for your circumstances.
For example, you may have been sold a policy which doesn't cover self-employed people and you're self-employed. If the company who sold it to you knew it was wrong for you, or didn't check on your circumstances properly before selling it to you, this is called mis-selling. If you were mis-sold an insurance policy, you should be able to cancel the policy and get a refund, although you will probably need to make a complaint first to do this.
Another example of being mis-sold PPI is when you are sold a policy at the same time as a loan or credit card, but not told about it. The lender is supposed to tell you if the loan includes PPI, explain how much extra it will cost and ask you to sign for it separately. If they don’t do this and you later need to make a claim which is refused, you can complain that you were mis-sold the policy and get a refund.
You may be approached by a claims management company offering to get you a refund of your payment protection insurance. But you don’t need to use one of these companies to claim a refund - you can claim back the money you're owed yourself. It's free to claim, you don't have to pay a fee to anyone and it's just as quick if you do it yourself. If you use a claims management company to make a claim, they will take a cut of around 25% from the money you get back, plus VAT. If you make the claim yourself, you will be able to keep all the money you get back.
If you have want to complain about your PPI policy, you should complain first to the insurance company which sells the policy.
You can use our sample PPI complaints letter to help you complain about mis-selling.
There is information about making a complaint about mis-selling and a very easy to use step-by-step guide on how to claim on the MoneySavingsExpert.com website at www.moneysavingexpert.com.
If you aren't satisfied with the response of the insurance company, you can take your complaint to the Financial Ombudsman Service. For more information about complaining to the Financial Ombudsman Service, go to their website at: www.financial-ombudsman.org.uk, or phone them on: 08000 234 567 (free for people phoning from a fixed landline) or 0300 123 9 123
(free for mobile-phone users who pay a monthly charge for calls to numbers starting 01 or 02).
You may need the help of an experienced adviser to make a complaint about PPI. You can get help from your local Citizens Advice Bureau. To search for details of your nearest CAB, including those which can give email advice, click on nearest CAB.
The Money Advice Service
The Money Advice Service is a free, independent service. Their website has more information about PPI and how to complain about mis-selling at: www.moneyadviceservice.org.uk.
The service also has information on how to complain about misselling at: www.moneyadviceservice.org.uk