How to Understand Payment Protection Insurance

When you take out a loan or mortgage or apply for a credit card, you may be offered Payment Protection Insurance (also known as PPI). While it can be a good idea to protect your payments, PPI isn't right for everyone.

Difficulty: Moderately Easy

Instructions

1. Understand what it is. Payment Protection Insurance is insurance for repayments on debts in the event of an accident, illness or unemployment.

2. Know what it does. The insurance company will make your repayments (or a percentage of them) for a fixed period of time (usually 12 to 24 months) while you sort out your work situation or focus on getting well.

3. Find out where to get it. When you take out a loan, credit card or mortgage, the lender will often offer to sell you Payment Protection Insurance as well. You can also get it from independent brokers, so if you are set on getting PPI, you may want to shop around for the best deal.

4. Read the exclusions. Many PPI policies have extensive exclusions about your age, the nature of your work and the types of illnesses that are covered, so be sure that you are actually eligible before signing up.

5. Understand the costs. Some policies offer a regular premium that allows you to include the cost of the PPI in your monthly repayments, while others charge you a single premium that adds the full Payment Protection amount as a lump sum to the cost of your loan, which means you will be paying interest on it.

Tips & Warnings

• Some employers may continue to pay sick or injured staff for a certain period, so check what cover you have from your employer before buying PPI.
• If you take out PPI and change your mind, you have a legal right to cancel within 14 or 30 days of taking it out (depending on the policy).
• Beware of small print and exclusions.
• Many lenders will try to encourage you to take out Payment Protection Insurance, even if you are not eligible.
• With most policies, you cannot usually claim for an illness you had before taking out the policy.
• Most policies require that you have been employed by the same company for the past twelve months on a permanent contract.
• There is usually a deferral period after you make the claim.

Resources

• Get more information on Payment Protection
• Visit moneysupermarket.com to compare quotes