PPI: Outdated or essential cover?
Wednesday, 25 February 2009 11:26
Payment protection insurance (PPI), which covers payments on loans in the event of illness or redundancy, has received a bad press recently with stories of misselling and poor value for money.
But arguably, insurance policies that provide help in times of unemployment have never been more useful, as job losses continue to affect almost every sector in the UK.
Sarah Routledge asks whether there is any value to the much maligned PPI, and what alternatives exist for people looking to protect their income?
"Unemployment levels are currently at their highest since 1997, with numbers reaching 1.97 million in December 2008," says Andrew Stocks, senior manager at Comparethemarket.com.
"Analysts predict that levels will rise to a further three million by the end of the year and with job vacancies falling by 11 per cetn on this time last year, payment protection insurance can help maintain payments on important outgoings in the event that a consumers personal circumstances unexpectedly change."
PPI is a type of insurance policy that covers payments on debts in the event the policyholder claims. Unemployment, sickness or accident usually triggers these claims.
An advantage of taking out such a policy is it could stop the borrower from spiralling into arrears if their income suddenly stops.
However, there have also been many issues surrounding the way they were sold, leading to an investigation by the Competition Commission.
As a result of the inquiry, the watchdog ruled that banks and retailers making a loan or credit offer can no longer sell PPI to customers for at least seven days, from 2010.
The regulator made the decision following complaints from consumer groups that the way PPI was sold often alongside a loan restricted competition and often led to consumers taking up an expensive, and sometimes useless, policy.
Analysts expect that as a result of the ruling, fewer consumers will take up the policy, leaving banks without a major source of income. However, it may also leave many consumers with little protection if they lose their job.
PPI claims rise
PPI unemployment claims rose to 19,105 in November 2008, up from 8,772 in November 2007 - an increase of 118 per cent, according to figures from the Association of British Insurers (ABI).
Nick Starling, the ABI's director of general insurance and health, says: "Losing your job is stressful enough, and even more so when you don't have any protection in place to help ease the financial burden.
"These figures are alarming, showing just how valuable PPI, and other types of protection insurance, are during difficult economic times."
With lenders soon to be banned from selling PPI at the point of sale - and several high street banks have already abandoned the practice - consumers will have to shop around themselves for protection, potentially opening the market and bringing down the price.
Comparethemarket.com has recently launched a new payment protection comparison service.
Jeremy Moll, commercial director at comparethemarket.com, says: "Starting at just a few pounds a month, a payment protection policy can be a consumer's best friend when times are tough, whether they are forced out of work due to redundancy or unexpected illness."
There are also standalone PPI firms offering cover, while a broker or independent financial adviser (IFA) should also be able to help.
Is PPI really worth buying
Not everyone in the industry is convinced PPI has much value for consumers.
Consumer group Which? campaigned for change within the PPI industry but still believes there is a way to go.
"What we always said is people should look at all sorts of products, not just PPI. There may be other products that offer a more holistic approach," says Lucy Widenka, personal finance campaigner for Which?.
"What people need to do is get advice and see what is out there."
Which? says it is now up to the industry to offer improved products for consumers.
Simon Burgess, from British Insurance, agrees with this claim.
"The concept of protecting oneself against redundancy is exceedingly pertinent," he says.
"The stance British Insurance has taken is that we were the foremost provider of PPI - but we don't offer it any more.
"Now we only offer income protection."
Income protection, which can cover workers against a loss of income in the event of unemployment, sickness or accident, pays out a fixed amount that can then be used to pay any household bills, not just the payment on a loan.
"It offers better protection to our customers and it doesn't have the tarnished reputation of PPI," he explains.
Consumers won't find these policies on a comparison site because "we don't want to compare our Rolls Royce products with Skodas" but can buy direct from British Insurance.
Matt Morris, spokesperson for specialist insurance brokers Lifesearch, says there is still a place in the market for PPI, especially for those who cannot get income protection insurance.
But in most cases, "PPI is a vastly inferior product to income protection," he says.
There are a few factors to think about if you are considering taking up a protection policy.
The type of job you have may make the policy more expensive, and if redundancies have already been announced at your workplace, you are unlikely to find cover.
In addition, the policy will not cover you for your entire salary - it is usually up to around 65 per cent of your after-tax earnings, as you would also be expected to be claiming state benefits.
Unemployment policies will also only last for a short period, usually between 12 months and two years.
There is also a danger of being over-insured, Mr Morris warns. Even if insurers accept a policy covering say 60 per cent of your gross earnings, if on a claim, after taking tax into account, they find this would make you better off than when you were working, they will reduce the amount paid out.
Most policies also have a 'deferred' period, so the policy will not pay out immediately. This is similar to excess and can make the policy cheaper, Mr Morris explains.
He says: "For example, someone who works in local government can have a long time on sick pay, so they might want a deferred period of six months."
If you are only concerned about unemployment insurance, "you should make sure you can buy this separately and don't have to buy accident and sickness cover too," Mr Burgess advises.
And if you need the policy to pay out from day one - particularly important if you would not expect a payout from your employer, or you do not have any savings to fall back on - British Insurance policies do not have a deferred period, Mr Burgess adds.
This is becoming increasingly important as waiting times for unemployment benefits increase.
These factors can make getting the right policy complicated, and it is better to get advice, says Mr Morris.
This could be through an independent financial adviser (IFA), or through an insurance broker.
"Don't make the mistake of going to your bank as they will only sell you their own products. There is no harm in asking, but it makes sense to shop around," Mr Morris adds.
Sarah Routledge
Comments
Newsletter sign up