Is payment protection insurance right for you?

By Marianne Curphey

Payment protection insurance (PPI) steps in to pay your debts when you can't -- because you're unable to work, for example. For those with piles of credit card debt and loans, PPI might seem like a vital safety net. Unfortunately, those buying policies often find out too late that they can't even use them.

What is payment protection insurance?
PPI is designed to cover debt repayments if you find yourself unable to work because of a serious injury or illness. It's been widely sold since the 1990s. It can be used to cover credit card debt, mortgage payments and loans.

PPI generally requires that the covered individual is in a permanent job when he or she takes out the policy -- so students, retirees and the unemployed are often not eligible. Some medical conditions, especially those which are pre-existing, will not be covered.

Why is PPI controversial?
There has been a significant rise in the number of people complaining about having been mis-sold Payment Protection Insurance (PPI), according to the Financial Ombudsman Service, which deals with disputes between consumers and financial services companies.

One of the issues with PPI is that the various policies from different companies all have very different terms, conditions and exclusions. According to the Financial Ombudsman Service, consumers are complaining that the details are not always spelt out when the policies are sold.

As a result, some consumers don't realize what they are buying, are unaware that they may not qualify for the coverage they're taking out and are ending up with policies don't need.

Some of the problems that are causing consumers to end up with useless policies include:

  • A lack of training. PPI is often sold by bank staff, along with loans and credit cards. These staff members may lack expertise in PPI's terms and exclusions and, therefore, cannot warn customers about them.
  • Misleading sales practices. Research by consumer advocacy group Which? suggests that nearly one-third of those who applied for a credit card in 2008 were under the false impression that buying PPI would increase their chances of being approved.
  • Insufficient research. Companies selling PPI sometimes fail to check into customers' employment status to make sure they actually qualify for coverage. They might also end up selling policies to those who are too old, or too sick, to qualify.

Consumer complaints could be a positive opportunity for banks that sell PPI to strengthen their relationships with customers -- but only if they handle claims correctly, says Juliet Coukham, director of retail lending strategy at financial services firm Callcredit.

"We firmly believe that if banks embrace their responsibilities and handle the claims process in a proactive, customer-friendly way, they can gain significant commercial advantage through improved brand perception, increased customer loyalty and additional customer insight," Coukham says.

Alternatives to PPI
If you don't have a partner who could carry on working to pay the debt, or you don't have any savings, PPI insurance might be a good fit for you. However, it is possible to buy a standalone policy, which might be less expensive than paying for the insurance as part of a credit card deal. If you do consider PPI, make sure you check the small print.

If the terms, exclusions and paperwork involved in PPI make you wary, you can avoid it altogether. One alternative might be to build up a savings fund in a high-interest account so that, if you do encounter financial difficulty, you can pay your debts out of an emergency cash fund.

Philip Pearson, independent financial adviser with P&P Invest in Southampton, says that everyone should have a contingency fund with six months' worth of cash.

"The best way to do this is to build a savings nest egg by putting away a set amount of money each month via a regular savings scheme," Pearson says. "For most people, this should only take a year, and you can then transfer your savings into an Individual Savings Account, which allows access to the cash if you need it."

See related: Does credit card debt die with you?; 4 wrong ways to pay off credit card debt

Published: 23 February 2012