Keyman Protection Insurance

Loan cover - watch out for Payment Protection Sharks

The Financial Services Authority (FSA) has been investigating the way Payment Protection Insurance is being sold by loan providers which include some of the UK's biggest banks and building societies.

And Payment Protection Insurance is big business!

Sales of Payment Protection Insurance, or PPI as it is also known earn lenders more than £1billion a year.

Payment Protection Insurance is designed to protect borrowers... paying monthly loan repayment in the event that the borrower becomes unemployed or unable to work through accident or illness.

Many lenders sell the insurance alongside the loan with around 50% of customers agreeing to the insurance. However, according to the Department of Trade & Industry, only 4% claim and of these claims 25% are rejected. This may be partially explained by the FSA's investigation which found that around half of the lenders surveyed failed to explain the details and exclusions to customers or make sure the insurance was suitable for the clients.

Payment Protection Insurance is often added to Loan quotes without being disclosed.

Whilst the investigation reportedly does not find that lenders are compulsorily selling the insurance, it was frequently automatically added to loan quotations without it being disclosed that the insurance was, in fact, optional.

Even worse, some lenders are failing to point out to borrowers that the cost of the insurance for the full period of the loan, was being added as a lump sum at the outset rather than being paid as a monthly premium. This means that the borrower cannot cancel the insurance without redeeming the entire loan and renegotiating a new loan:

And hey, some of these lenders certainly know how to charge for Payment Protection Insurance.

Payment Protection Insurance inflated

According to Simon Burgess, Managing Director of British Insurance Ltd, one of the big high street banks typically charge GBP30 per GBP100 of loan insured. This, he says, compares with between GBP4 and GBP6 if bought separately on the internet. This view is supported by price comparison service uSwitch which says taking out Payment Protection Insurance with banks can increase the amount you pay for cover by nearly 500%.

Example of Payment Protection Insurance on Loans

Last year a high street bank was charging GBP5,150 for Payment Protection Insurance to cover a loan of GBP16,000. The cost of Payment Protection Insurance was then added to the loan making GBP21,150 as the total capital repayable and interest charged on the lot. This meant that of the GBP300 monthly repayment, about GBP70 represented the cost of the insurance. Equivalent insurance can be bought on the Internet for around GBP20 per month and cancellable at any time without penalty.

So what are the lessons of Payment Protection Insurance when taking a loan?

  • If your lender offers you Payment Protection Insurance cover ask for the monthly premium with and without PPI. That way you can see the true cost of Payment Protection Insurance.
  • Find out whether Payment Protection Insurance is added to the loan as an initial lump sum. If it is back off!
  • Shop around for competitive quotes. A search on the Internet for "Payment Protection Insurance" or "Income Protection Insurance" will find you lots of web sites to try.
  • Check out the conditions on the insurance. Particularly check out the exclusions which invalidate a claim.
  • For example, some policies stipulate that you must have been working continuously for 6 months prior to a claim for a minimum of 20 hours a week. Seasonal or temporary work is usually excluded. When you take the insurance out you must be in good health and know of no impending disability and not be aware that you could become unemployed.

    Could these exclusions apply to you?

    If so, the insurance will be of no use to you please don't waste your money.

    Payment Protection Insurance on loans is a good idea so long as it is cheap and on a monthly cancellable contract.

    After all, your circumstances may change.

    Then check the policy's exclusions to make sure that the insurance is valid for your personal circumstances.

    Michael Challiner has 15 years experience in financial services marketing at senior level. Michael now works as the editor of Brokers Online. Brokers Online offer access to many different types of including tenant loans and secured loans. Brokers Online also offer access to loans protection products such as income protection and mortgage payment protection.

    Article source:

    If you found this page useful please click the +1 button below to tell Google that its a great page!

    Please share this page with others, and leave a comment, we value all feedback!

    Was this page useful? Do you have something to add? Do you disagree?

    If your comments meet our guidelines then we will publish them (you do not need to register!)

    Ttradesman - click here to join our network to receive leads from customers in your area

    "once an initial lump sum has been added as insurance can this be cancelled ?"

    joe leathem