Payment protection insurance is designed to cover debt repayments in the event that borrowers are made redundant or are unable to work due to illness or accident.
Policies usually pay out after a deferred period of either one month, three months or six months and then pay out for up to 12 months if you are unable to work.
When taking out a loan or credit card you may be given the option of buying PPI. It could even be rolled up into your loan without your knowledge, increasing your monthly repayments. Be sure to check with your loan provider.
PPI is not compulsory and although it is offered by most lenders it is expensive and you are entitled to refuse it. Loan and credit card providers are wrong to include it in your quote without telling you. Whether or not you need it depends on what savings or other provision you have, and also what cover your employer may offer in the event of redundancy or illness. If you are a dual income couple the risk is also reduced.
Before you sign up for a loan always ask the lender if PPI included as part of the package. Some providers will quote your repayment amounts including payment protection insurance and fail to tell you.
Always ask to see what your loan repayments would be without payment protection insurance added so you can see the real cost of the cover. And never sign a loan agreement before reading the small print.
If you do want PPI, you will do better to take out a separate policy as tied cover is unlikely to be the cheapest.
There are many insurance providers who offer income protection cover on a stand-alone basis. Policies start from as little as £2.50 a month per £100 of cover.
You can tailor the type of cover you want to your individual needs. For example, you can choose to have just accident and sickness cover without unemployment protection.
Some employers will continue to pay sick or injured staff for a certain length of time – so always ask your employer first to make sure you're not buying cover you won't need.
Increasing your loan
If you increase the size of your loan be careful. Some lenders will simply churn the insurance and add more on top as rolling cover without telling you. So here again you should ask if PPI will be added.
Be warned – this might not be an option after you have signed up. It depends on the nature of the insurance and the loan contract.
Many policies allow you to pay for PPI on a monthly basis so you can cancel the payment at any time but check with your provider.
If you have signed a contract that says you will have PPI, for example 12 months or the duration of the loan then you may not be able to terminate payments.
If you do redeem your loan early you might not be able to claim back your premiums. If you agreed to a loan amount upfront, where the insurance costs were included, you could be liable to repay the full amount.
If you feel you were misled by a loan or credit card provider, or it was not made clear to you that insurance was included in your loan package before you signed up, then you may have a case for mis-selling, even if your signature is on a contract. The rules state that PPI inclusion should always be made clear at the outset.
In the first instance you should complain in writing to your loan and PPI provider. If the outcome is unsatisfactory, you can refer your case to the Financial Ombudsman.