For many of us, one of our biggest fears is not being able to pay the mortgage or meet other financial commitments should we find ourselves made redundant or unable to work through illness or accident.
While there are a number of ways in which you can protect yourself against loss of income, one of the more controversial forms of cover is payment protection insurance (PPI).
What is PPI?
PPI is designed to cover you if you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards.
But while it can offer a sense of security, the cover can be overpriced, filled with exclusions and often mis-sold.
For example, policies do not pay out if you are self-employed, and if you do make a claim, the benefit is often little more than the premium paid.
That said, if you do qualify for a payout, the short-term lifeline it offers can help you to survive a financial crisis.
What is MPPI?
Mortgage payment protection insurance (MPPI) policies pay your mortgage for a year – sometimes two years – if you are unable to work because of accident, sickness or redundancy.
However, it is recommended that you consider income protection before opting for MPPI (see below), as income protection pays out for decades. MPPI policies also have many exclusions. For example, you may not be covered for existing medical conditions.
PPI under scrutiny
The consumer group Which? first highlighted the problems associated with PPI a decade ago. Yet when it carried out a mystery shopping exercise in 2007, it found that consumers were still being “duped” into buying the cover.
It said that people were at risk of unknowingly purchasing the cover because staff at some providers added PPI during the sales process as a matter of course.
Elsewhere, a number of lenders were fined by the Financial Services Authority (FSA), the City watchdog, for mis-selling.
At the same time, an investigation by the Office of Fair Trading (OFT) exposed sales staff for telling borrowers that the cover was compulsory, or including it in loan quotes without explaining that it was optional.
The OFT referred the PPI sector, including MPPI, to the Competition Commission in February 2007.
What progress has been made by the Competition Commission?
In January 2009 the Competition Commission ruled that banks should be banned from selling PPI alongside credit cards and personal loans.
The Commission’s investigation concluded that lenders have an unfair advantage selling PPI with credit products, resulting in an uncompetitive market where consumers are overcharged.
It ordered that from 2010, banks and retailers making a loan or credit offer must wait a week before they can sell PPI to the borrower. The Commission hopes the seven-day cooling off period will encourage consumers to shop around for the best deal.
Single-premium PPI – when the cost of the insurance is added to the debt so that borrows repay interest on both – has also being prohibited. The Commission also ordered lenders to provide personal PPI quotes and annual statements to customers.
Check with your lender
If you take out a loan, check whether the quote includes PPI and remember that it is not compulsory. If you don’t want it, you can ask the lender to remove it.
Consider a standalone policy
If you do want to take out PPI, it is generally cheaper to buy standalone cover offered by the likes of British Insurance, the broker
Claim a refund
Consumer groups, such as MoneySavingExpert, have started campaigns to encourage borrowers to claim refunds on PPI. Template letters can be downloaded from the website to help you to reclaim the costs associated with the cover.
Consider the alternatives
Before opting for PPI, make sure that you look at the alternatives. For most people, an income protection policy should be the first choice, according to the protection broker Lifesearch. These policies are designed to pay out tax-free replacement income if you are off work through sickness, accident or injury.
However, do not sign up until you have found out what is covered by your employer’s sick-pay scheme, as you could be over-insuring yourself.
Also useful is life cover with a good critical-illness policy, which pays out a lump sum if you have a serious illness diagnosed. These two types of cover tend to be sold together, but note that critical-illness cover is a luxury product and should be bought only in addition to income protection if your budget allows.
Make use of the internet when comparing products. Income protection comparison tables can be useful when researching the various options.
Do not buy on price alone
When buying any protection product, price should not be the only consideration. You should also look for the policy that best suits your individual circumstances.
Furthermore, always consult a financial adviser when buying protection insurance, as that is the only way that you can make a complaint if the product you are sold is usuitable for you.