Payment Protection Insurance (PPI) is one of the favourite subjects of the financial press currently. Why is this? Well the answer is simple! It is because the sale of these insurance policies alongside products such as loans and credit cards is simply wrong. So wrong in fact that it couldn’t any more wrong.
In a nutshell the economics of lending money, either via loans or credit cards simply do not work unless they sell enough PPI, yet the PPI product itself is very very expensive, and not always appropriate. The combination of these two factors means that as a product it is sold very badly – in fact many people take the product out without even knowing it!
How has this ridiculous situation arisen? First of all lets look at what PPI actually is. “Basically it is an insurance policy that will make repayments on a loan for you should you lose your job, have an accident or are taken ill. It is sometimes also referred to as Accident, Sickness and Unemployment insurance or ASU”.
In theory this is great but there are some catches. For instance there are some exclusions like self employed people, or pre-existing conditions. In many instances the level of cover is not that great, especially on credit cards where some products only pay the minimum amount on your card each month, sometimes as low as 2%. Also, as I have already said the policy is very expensive, especially for this level of cover, and the fact is that most of the cost is made up of commission which goes to the lender! This is money for nothing for them, as they do not carry any of the risk i.e. if you make a claim it is the underwriting insurance company that pays – not them!!
The reason is it so expensive is, and they rely so much on selling it is very straightforward. The loan market has got very very competitive which means that most companies who have a competitive product do not actually make any money from it, especially as so many people now repay loans early, and they have to sell PPI to make a decent return. In most cases they will make you pay the premium up front, add it to the loan and charge you interest on it! Amazing! More money for them!
PPI is also sold badly.
Many lenders add it to the cost of the loan without the customer actually asking. Many ‘suggest’ that you will not get the most competitive rate unless you take the insurance, and with many consumers ignorant to their rights and what this means, they end up agreeing to it.
Additionally there is huge pressure on loan brokers to sell PPI. They get significantly higher commissions if they sell the products, so the broking world is equally dependent on this product.
Some of the secured lenders now offer a refund of premiums if you have made no claim within 5 years (some are 10!). This sound great but in reality very few people keep their loans that long.
The really bad thing is that for secured loans, if you do redeem the loan early, you still have to pay back the element that paid the premium, even though it was to cover a loan you have paid back! It really is that ridiculous and scandalous!
A number of steps need to be taken to fix this problem.
Firstly we need to see better, and stronger regulation around the sale of PPI. I am not fan of regulation for regulations sake but it is desperately needed.
Secondly I believe that lenders should be compelled to adjust their interest rates to show the cost of the loan including PPI. They will argue that PPI is a separate product but many consumers use the APR as a way of comparing loans – and this is impossible if you are taking out insurance.
Thirdly, and perhaps most controversially I believe lenders should be forced to offer a monthly premium PPI product as well as the single premium products they offer at the moment which is where they add it to the loan and charge you interest on it. What other forms of insurance require you to pay the whole lot upfront? None.
If you are looking for a loan, you should consider how you would deal with repayments should you lose your job or have an accident. You should consider insurance. However I would strongly recommend that you visit an insurance broker and take out a stand-alone ASU product. It will cost you much less than the product offered by the lender. Don’t let the lender bully you into taking their product – it really is appalling value.