Payment Protection Insurance: Waste of money or essential protection?
Wednesday, 02 September 2009 07:41
Ask anyone with loans or mortgages for their opinion on payment protection insurance (PPI) and you are likely to be met with a sharp intake of breath.
A mixture of well-publicised mis-selling scandals surrounding PPI and the fact that many borrowers resent relinquishing additional funds from tight budgets to pay for a product they feel unlikely to use, mean people are very dubious.
According to consumer group Which? more than two million PPI policies have been mis-sold.
To make matters worse, it has recently emerged that many insurers have been inflating premiums during the recession to cover themselves for the torrent of payouts expected as redundancy in the UK becomes rife.
It's not surprising so many consumers feel uneasy about it. And that's before you speak to all the people who have paid premiums for years only to find a clause in their contract which means they could not claim when they lost their job.
PPI has become, quite literally, bad news.
But there are still those who are willing to stand up for PPI and who think that by avoiding or ditching the plans, borrowers are exposing themselves to greater vulnerability if they lose their job and cannot pay off their debts.
They think that in today's traumatised economy, where the chances of redundancy and unemployment are at a worrying high, protecting yourself against financial ruin is essential.
PPI, in theory, is a good idea. It is an insurance policy which covers people who have borrowed money - via a bank loan or as a mortgage for example - in case they cannot make repayments.
This might be due to being made redundant, being forced to give up their job for a long period due to illness or having an accident which incapacitates them.
The problem was in the past many people, desperate to take out loans, agreed to sign up to a PPI policy which was sold to them by their lender.
Many of these lenders led borrowers to believe they would not receive their loan if they did not sign up to the PPI. But this was not the case.
Rachel Halliday, a PA, took out a bank loan eight years ago and was under the impression she would not be accepted for the loan unless she also signed up to PPI plan.
She said: "It was quite expensive and I can't say it really gave me peace of mind, just added more expense to what I borrowed."
Rachel said, on inspecting the terms and conditions, it emerged that she would not have received a payout on her policy until she had been out of work for three months.
"It kind of defeats the object", she said.
And this is the other problem with PPI. Many people were not made clear on the terms of conditions of their policy, and this meant consumers who thought they could claim, could not.
Louisa Jonas, it would seem, was one such person. She and her husband took out a payment protection policy on their mortgage a number of years ago.
They did not claim on it until recently, when her husband was made redundant, and they discovered they were not entitled to a penny.
Louisa said: "They wouldn't pay out because I was still working. Apparently if you are in a couple you must both be out of work for it to come into effect."
It's a fair point, but Louisa and her husband were not made aware of this when they were sold the policy.
At least the industry regulator, the Financial Services Authority (FSA) is on her side. In June Lord Turner, chairman of the FSA, told the Association of British Insurers annual conference that mortgage PPIs had become one of its major concerns in the economic downturn.
He said the FSA has noted that many insurers had inflated premiums or had reduced cover for policyholders and that this was unfair.
Lord Turner added: "How many consumers would have taken up this cover if they had known that at the very time they needed the protection the most, the price of it could significantly increase or the amount decrease?"
But if all PPI providers were put under pressure to make their terms and conditions more transparent, would more people be willing to dip their toe back into the PPI waters?
Earlier this month LV= announced it was improving the terms of its mortgage and lifestyle protection unemployment cover.
The firm has ditched the 60-day exclusion, which meant policyholders couldn't claim if they needed to claim 60 days after taking out the PPI plan.
The firm's head of protection, Chris McFarlane, said PPI was more essential than ever in today's economic climate.
He said: "As the unemployment rate recently hit 7.2 per cent our market-leading cover is more relevant than ever."
Mr McFarlane added that it was giving customers greater confidence their plan would pay out when it mattered most.
The FSA endorses PPI as being useful and providing worthwhile cover against unexpected changes to your personal circumstances.
However it also urges caution and points out that it is not compulsory. It is not compulsory to take out PPI in order to be accepted for a loan.
It also said that if you don't have another insurance policy which would cover you in the event of losing your job, or did not have savings then it was also worthwhile.
And it urged people to check in detail the terms of the policy to ensure you knew what you were covered for.
But, while the PPI industry is clearly being more closely watched, it appears there is still work to be done in bringing the pitfalls of these policies to light and preventing the industry as a whole from being tarnished.
It's a sentiment backed by Citizen's Advice chief executive, David Harker. He said: "It's vitally important that in the current recession people have access to the reasonably priced, effective, good value policies they all need.
"We want to see the government and regulators setting standards that deliver these improvements and put an end to the high prices and poor quality that have pushed many people into debt and given PPI a bad name."
Kate Saines
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