If you have a personal loan, credit card or mortgage, you will more likely than not also have bought a payment protection insurance (PPI) policy to cover one or all of them. There has been growing concern recently over the way these policies are sold, with the Financial Services Authority particularly alarmed by evidence of mis-selling and pressure sales tactics. Here is what you need to know about PPI.
What is it?
PPI is insurance that covers monthly repayments on your loans if you have an accident or sickness and are unable to work, or you become unemployed. PPI - also sometimes known as Accident, Sickness and Unemployment (ASU) insurance - can be an important safeguard against unexpected changes in your personal circumstances.
However, some policies are unsuitable for customers because of limitations and exclusions contained in the policy. For example, if you are self-employed and fall ill, your PPI policy does not protect you. The problem is that many people fail to read the small print when the policy is sold, and many lenders sell policies unscrupulously. The worst offenders include the policy in the amount you borrow, meaning you pay insurance on your monthly policy as well as your borrowings. This can make getting a refund difficult if you cancel.
That's disgraceful! What action is being taken?
The FSA last year launched a crackdown on the mis-selling of PPI. Among the problems encountered were companies pressurising loan applicants into taking out cover by claiming it was compulsory. The FSA also found some companies mis-leading customers about the true cost of the policies.
The watchdog has so far fined Regency, Redcats and loans.co.uk for poor PPI selling practices. More recently, it hit store card supplier GE Capital Bank with a �610,000 penalty for failing to ensure that policies were sold only to those new cardholders where cover was appropriate.
GECB's main business is providing credit finance through store cards, credit cards and sales finance. The store cards are usually branded in the name of the retailers (who are appointed representatives of GECB) and the insurance is usually offered to customers at the till when they are applying for a store card. If not bought at the till, customers are contacted later by GECB's telesales staff.
FSA Director of Enforcement Margaret Cole said: "Millions of people take out store cards every year. They need to know that PPI is almost always optional and should consider whether they need it before signing up.
"Our focus on Payment Protection Insurance will remain very high this year. We are determined to see significantly better practice in PPI sales and will crack down where firms fail to treat their customers fairly."
Are all PPI policies a rip-off?
No. PPI does have a useful role to play in honouring your financial commitments if you fall ill or lose your job. According to research from Standard Life, one in three UK employees have taken more than a week off work through illness or injury. More than two-thirds of workers confirmed they had suffered a loss of earnings because of this time off work, which equates to some �31.65 billion.
What are the main features of PPI?
PPI only pays out for a set period of time, generally either 12 or 24 months - although you may be able to make further claims later. You may not be able to make a claim for an illness you already have or have had before. Stress or back complaints, and other common conditions that cause absenteeism from work are normally not covered.
The standard mortgage protection policy will cover your monthly mortgage repayments for a set period of time - usually 12 months, sometimes 24. PPI for credit and store cards generally pays off a percentage of your outstanding balance or the minimum payment each month for up to a year, while loan cover will pay your monthly repayments for 12 or 24 months.
When you take out a policy you pay by a single or regular premium. The single premium is added to your loan, thus increasing what you borrow and your repayments. A regular premium is a set amount you pay each month.
What is typically excluded?
Common exclusions on income protection policies include: disability due to or caused by hiv/aids; pregnancy and childbirth; self-inflicted injury; criminal acts; misuse of alcohol or drugs and failure to follow medical advice.
There is usually an initial exclusion period before you are eligible to receive benefits. This always applies to redundancy cover only and is typically around 90 days.
If you have any hand in making yourself unemployed, cover does not apply. Short-term contracts are not covered; nor is seasonal work.
I have an existing medical condition. Will I be able to take out PPI?
Yes, but you will not be able to make a claim for a medical condition you were aware existed at the time you took out the policy, or sometimes earlier.
Is it expensive?
It can be. For example, a Co-op Bank loan of �5,000 with no PPI is �3,053 less than a loan of �4,950 with PPI. A standalone income protection policy will probably be cheaper.
Do I have to take out PPI with a loan?
No. PPI is almost always optional but if a lender forces you to buy their PPI policy, they are not technically breaching any guidelines. However, the Financial Ombudsman could find that a lender who forces you to take out insurance has acted unreasonably. Banks who subscribe to the UK Banking Code have undertaken not to make customers buy their policies.
Where can I get a standalone policy?
You can avoid being sold a policy that you don't need, or that is needlessly expensive, by buying one yourself separately. Policies are sold by insurance brokers - online or on the High Street - as well as banks and the likes of the Post Office. You can easily shop around for a cheaper deal at Tiscali's Money Shop.
What should I ask when I take out a policy?
Find out whether the policy is a single or regular premium. Make sure you have a legal right to cancel the policy within 14 or 30 days of taking it out. A provider is within its rights to charge you for this period even if you cancel. Ask the salesperson to explain the terms and conditions of the policy and the exclusions.
The salesperson must tell you how much the insurance will cost you separately from the costs of the loan. If they don't, you can claim compensation for mis-selling.
If you have a single premium policy and you cancel after this initial cancellation period, you will usually find the refund you get is not in proportion to the remaining policy term. So you could get less than you might expect, or even nothing. Check with the salesperson whether you would get a refund and how it would be calculated.
What should I do if I have a complaint?
In the first instance you must complain in writing to the firm that sold you the policy, to give them a chance to put things right. If your complaint is about a claim, you should complain to the insurance company. It has to respond to your complaint within five days, and resolve it within eight weeks. If it doesn't, or if you are dissatisfied with the outcome, take the complaint to the Financial Ombudsman Service. Click here to find out how to do this.
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