Payment protection explained

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14 May 2009

Payment protection insurance is designed to cover loan and credit card repayments if you are unable to work due to accident, sickness or unemployment. However, it's been under the spotlight recently because of concerns over the way it was sold by some providers. As a result, a number of banks have been fined by the FSA, while the Competition Commission will introduce new rules as to how the insurance can be sold later this month.

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Clare Francis: Such has been the bad press about PPI (Payment Protection Insurance) that some people will be questioning whether or not it's worth having, and while this is understandable it is something that shouldn't be necessarily ruled out. Tim Moss, who is head of loans at, is with me to explain why.

Q1: So Tim, can you just start by explaining what's happening in the market at the moment? What changes are we seeing later this month?

Tim Moss: We've seen the Competition Commission who have been looking at the PPI marketplace and products now - they've been looking for nearly two years - and they're coming out with some quite significant changes about how PPI can be sold, one of them you're right is this month, and that is the prohibition of the sale of single premium PPI.

What that means is in the past when you took a loan and if you took PPI at the same time, you effectively 'borrowed' a lump sum on top of your loan to pay for the policy, so that meant it was also open to the same early repayment charges...

CF: And interest?

TM: ... and interest of course, that the actual loan was, which is a little bit unfair because actually unlike car insurance which you can pay on a monthly basis or you can split it over - this was you borrowing it in one lump sum.

So they're banning the sale of that straight away, and to be fair many lenders have already taken action to actually stop selling single premium PPI as soon as they knew the rule was coming into place, and they've moved to monthly policies which are much fairer on the consumer.

Q2: And presumably that means if your circumstances change and/or you either need to increase your level of cover or stop cover because you've cleared your loans and credit cards or whatever, you can stop the payment without penalty?

TM: Exactly, that's right. It's a monthly policy and there's no reason why at any stage you shouldn't be able to stop that policy. It's not like motor insurance or home insurance - which in many cases is compulsory - it is an add-on on top of the loan. If at any point your circumstance change, perhaps you get a better paid job or a more secure job, you are able to stop paying for it.

Q3: One of the reasons why PPI has been under the spotlight has been because of concerns over the way it was sold. Policies tend to include some common exclusions. For example they won't pay out / you're not covered if you're self employed or if you're a housewife or student, things like that. Certain medical conditions are routinely excluded.

So people were finding that they'd been sold this insurance when they took out a loan or credit card, when they came to make a claim they weren't even eligible for it, so I think that's one of the reasons why it's perhaps got the bad name that it has.

But can you just explain what the benefits of the insurance are and why, particularly at the moment with the economy in the state it's in with unemployment rising, it might be something that people might consider?

TM: You're quite right Clare. The actual Competition Commission (CC) investigation came from the fact that many people were sold PPI policies that actually provided them with very little benefit - in effect many of them had been mis-sold the policies - so that's where the CC originally investigated this.

However there can be many benefits to PPI, we shouldn't forget that and as you quite rightly said, with the state of the economy at the moment it can provide reassurance to people who may be a little bit unsure about their job or potentially where their career is going, it gives you that kind of reassurance. It's a bit like motor insurance, which is compulsory: the fact that should the worst happen, you have something to fall back on.

Q4: So how does it work? What does it cover you for?

TM: It can cover you for many things - and you can choose that - and one of the things that the CC is trying to get people to do is compare products. So don't necessarily take the lenders product - go out there and go and have a look on sites such as ours, where you can say 'what do you want cover for?'

Maybe its just unemployment cover that you want, because you don't necessarily need the accident or the sickness part, but you can pick and choose - it's like a menu - and of course the cost changes along with that as well.

Q5: If you do need to claim, if you are made redundant or if you develop an illness that stops you from working for a time, does it cover all your repayments, do you choose the level of cover that you have? What does it cover exactly for?

TM: Well, policies are all different and you need to look at the small print. Now normally if you're taking a policy that's from the lender, it will cover for that specific loan and that loan only. The great thing about these standalone products is they're not just necessarily payment protection - it is an expenditure protection so you can cover a certain amount of money every month that you've got to pay.

And you can use that money for whatever you want! It could be the fact you want to cover your mortgage payments with it, it could be the fact that you want credit card repayments, it could even be the shopping bill that you want to cover - it's what is important to you.

So you can cover a certain amount of money, so let's say its £200, and that £200 can go towards a proportioning that between your debts, because potentially you have got some savings and you can make up the rest of it. Maybe you want to cover the whole of the month, say £500, but of course the cost is going to be in proportion to how much you wan to cover, but it's a very, very flexible product because its not tied to just the loan.

Q6: So do these policies pay out indefinitely and do they kick in straight away?

TM: Again it's going to depend on the policy and the cost. There are some policies it will start straight away, and obviously if you've been made redundant they're going to need to see proof of that, and quite often they actually only kick in when you start actually claiming things like jobseekers allowance as a proof of the fact you've been made redundant.

But some of them start straight away and some of them continue for actually how long you are either ill or out of work for, but some of them will only pay for the first 12 months - its all going to come down to cost.

If you want the full, what I'll call the 'bells and whistles' products, then of course you're going to have to pay a significantly higher premium than for a reduced product that doesn't kick in for the first 3 months and only runs for the 12 months after that.

Q7: I guess we're probably heading towards a period of sort of re-education then as far as PPI policies are concerned, because obviously traditionally they have been sold with a loan or with a credit card to cover the repayments of that one product. So because it's much more all encompassing, in theory, as a product, I guess its sort of re-educating people to think of it in a very different way? 

TM: Yes you're right. This is really where the consumers won in this case, because the FSA along with the CC have forced these changes through. The banks weren't going to do this by themselves, because lets face it in 2007 there were nearly £4bn of PPI premiums on the back of things like loans and credit cards - it was a very lucrative industry.

And to some extent, banks are there to make profits, so why not make some money? But I think the profits they were making were too significant, so this [is a] re-engineering of the product - and effectively its hit the headlines.

It could be quite a good thing, because there'll be some people out there who won't know what the benefits of PPI are and they've been quite scared of it, and as you said with the economy and the state its in right now, PPI really should be in the forefront of everyone's considerations, and at the end of the day these changes mean that you can make an informed decision, and that's what's important.

Q8: It's probably also worth mentioning about claiming. If you do feel that you have been mis-sold - maybe you took out a policy with a loan and you had to make a claim and found you were ineligible - there is a sort of recourse and recompense available isn't there, a route you can go down?

TM: Yes there is Clare, there is the Financial Ombudsman Scheme who will look at complaints, and they will effectively take a judgement on what you're telling them and also what the lender, or in some cases the broker, is telling them, and they'll make a judgement call on whether actually you were mis-sold the policy at the time or whether the policy was sold fair and square, in which case there is no case to be heard.

CF: Thank you Tim.

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