How to Know if you Need PPI

PPI, or Payment Protection Insurance, is a policy borrowers can take out to protect themselves from defaulting if they are too ill to work or suddenly lose their jobs. PPI can cover most types of debt, including personal loans, mortgages and credit cards. They are mostly offered by the lender along with the original loan, but you can take out a stand-alone policy.

Difficulty: Moderate

Instructions

1. Decide whether insuring your loans is a necessity for your lifestyle. For example, if you are old and have an increased risk of contracting debilitating illnesses, have a large family with many people to support, or you are the sole breadwinner, insuring your loans might provide you with peace of mind in case of an emergency.

2. Find out if your employment situation disqualifies you from claiming on a PPI plan. There’s no point in taking out PPI if you are self-employed, work part-time or suffer from an existing medical problem.

3. Don’t sign up to a PPI policy if you’re hoping it will protect your payments if you should be incapacitated by any serious illness, such as cancer or heart failure. Lenders are aware that these illnesses now are diagnosed and treated much quicker than in the past, and are reluctant to pay out straight away.

4. Ask your employer to explain the company policy regarding long term sickness. Although some employers will only pay Statutory Sick Pay if your illness exceeds four days, most have their own sick pay schemes. Some of the larger companies even will pay your regular salary for up to six months. A plan that generous would let you make your loan repayments without taking out a PPI. Also, if your partner or spouse earns enough to support you both during any illness, you may not need the insurance.

5. Remember that most high street banks and nearly all credit card companies will add payment protection insurance into the cost of your loan or debt without asking you. You can have it removed if you don’t think you need it. However, some PPI contract won't let you opt out if you’ve already accepted the loan. Check before you sign anything.

6. Check the details of your policy carefully before you commit to anything. Policies are generally valid for up to 12 months, but this can vary. Study the terms required before you can make a claim. For example, do you have to be too ill to do your job, or do you have to be too ill to do any job before the PPI lender will pay out? You should also check whether your PPI plan covers the entire balance you owe or just a percentage.

7. Remember that whilst PPI can be invaluable in the event of an accident or illness, it doesn’t come cheap. The payments are calculated relative to the size of the debt you are insuring. Before you take out a policy, work out a budget to see if the PPI makes your loan unaffordable.

Tips & Warnings

• There are other ways to insure your loans and protect yourself against defaulting other than taking out a PPI policy. Check with your bank or an independent financial advisor to find the best option.
• Payment Protection Insurance is notoriously hard to claim on. Only about 4% of people with policies make claims, but lenders reject at least 25% of these claims. Be prepared to give full evidence to support your claim, and be persistent until you receive what is owed to you.
• The Financial Services Authority, Competition Commission and the Office of Fair Trading recently started investigating how banks are operating PPI schemes. If you think you have been mis-sold a PPI, or sold it without your knowledge, you may be able to claim it back. Banks are allowed to insist you have some form of payment protection insurance, but they can't force you to buy theirs. If this has happened to you, first go through your bank’s usual complaints route. If you don't receive satisfaction, take your complaint to the Financial Ombudsman.