What is it?

Payment protection insurance (PPI) – also known as accident, sickness and unemployment cover – can be valuable since no one knows what the future holds.

PPI protects a borrower’s ability to maintain repayments on the specific amount borrowed and helps them avoid getting into debt should they be unable to work because of an accident, illness or it they lose their job through no fault of their own, such as being made redundant.

But, it’s also vital to make sure you understand how this cover works and what the exclusions are before you buy.

For example, not all policies are suitable for the self employed; others may not pay out if you claim because of back problems or stress. But, research has shown that many who claim are satisfied with the process. And, most policies will include help, via employment agencies, or perhaps vocational counselling to assist you find suitable employment if you’re made redundant. Of course, offering practical support also helps the insurer manage the claim better, but is also often welcomed since you know you’re not alone following what is often a traumatic event.

How do I buy it?

So, if you’re offered cover, perhaps at the time of taking out a mortgage, loan or credit card, don’t just allow the sales person to tick the box. PPI can be a safety net, but is not suitable for everyone. Don’t fall for high pressure sales techniques or be afraid to ask questions about what is and isn’t covered, and equally importantly how much it costs.

Many people do not realise that they have a choice other than the cover offered direct by a lender – such as the bank, building society or credit cared provider. Moreover the purchase of PPI cover should not be viewed as ensuring that a loan will be granted. Instead, you often find there is better insurance both in the cover and price available from an independent specialist intermediary available on the BIBA website www.biba.org.uk – and this also means you will benefit from expert advice.

How does PPI work?

PPI is designed to cover repayments if your earnings stop. But, it’s important to remember that PPI will only pay out for a set period of time, which is typically 12 months. However, some plans do cover for up to 24 months. There is also a waiting – also known as the deferred - period before you start to receive payments and this is usually 30 or 60 days. Many policies will pay out in blocks of 30 days. But if you return to work after 28 days, these policies will not pay out, so look for policies which do not have this condition.

Some PPI policies are poor value and some also have more exclusions than others. If you’ve already been offered one policy and are not sure whether it’s good value or not, then it makes sense to do a comparison with one from a specialist intermediary.

You’ll often buy PPI at the time of taking out the financial arrangement, but you can also take out cover at a later date.

You should check what existing protection cover you already have, both through your employer and personally. If you already have existing unemployment and or incapacity insurance, watch out for over insuring. Each insurer will reduce the benefits they are prepared to pay you in proportion.

And, remember, you normally have to continue paying the premiums throughout the period of any claim, so ensure you add the insurance premiums to the monthly cover benefit you need.

Why you may need PPI 

These are uncertain times and no one knows if their job is safe, they could have an accident or if illness could strike.

State benefits have been reduced and there is typically a nine month wait before these begin. During this time, your mortgage, for example, could be in jeopardy. Although PPI only pays out for a limited period, it can act as a sticking plaster until you find new work or recover from that accident, ill health or to find a new job.

No one needs reminding there is a debt mountain in the UK and few of us have sufficient in savings to cope without a regular salary.

Who can buy cover?

First, check if you are eligible to buy PPI. You should be able to answer “Yes” to the following. If not, then cover may not be suitable.

• You must be aged at least 18 and under 65
• You must live in the UK , Channel Islands or Isle of Man
• You must work for at least 16 hours a week and have done so continuously for the last six months
• You must not work in an excluded high risk occupation
• Your mortgage or loan must not be in arrears
• The mortgage or loan you wish to protect must not be for commercial purposes, such as buy to let

If you want cover against unemployment then you should be able to answer ‘Yes’ to the following. If not, then cover may not be suitable.

• You must be able to register with the DSS as unemployed within the UK
• You must not work outside the UK or the EC for more than 90 days
• You must not be employed on a fixed term contract and have less than two years service with your current employer
• You must not be on a fixed term contract which has six months or less to run
• You must not be aware of any proposed redundancies or re-organisations in the business you work for, even if your own job or department is not included in any review
• You must not be aware of any financial or contractual threat to the business you work for, especially if you are self employed or a director
• Your job must not be casual, temporary or seasonal in nature and unemployment must not be a regular feature of your job
• You must not have retired early
• You must not work for an employment agency on short-term placements

What if I’m self employed or on a contract?

Some PPI plans offer cover for those who are self employed, but even if this is the case, they do not pay out simply if there is less work around. For a claim to be valid, it is likely you will have to show you have involuntarily ceased trading because you could not find enough work. Voluntary insolvency will not be covered and you must also have informed the Inland Revenue you have ceased trading. If you still have some income coming in, this may count as an exclusion so be completely clear on whether the policy offered is relevant for the self employed.

Likewise, if you are a contract worker, some plans will offer cover, but you should be clear at the outset what the terms and condition are.

Some insurers will accept your claim if you have been on a contract for at least 12 months and had it renewed at least once or worked continuously for at least 24 months.

Health matters

Cover for sickness is usually only available if you are in good health. Those with disabilities may have additional exclusions. You may not be able to obtain cover if you have a pre-existing or chronic medical condition although some may cover a non chronic condition after 24 months if there has been no reoccurrence or treatment.

Some insurers will accept your claim if you have been free of symptoms for a certain length of time prior to taking out the insurance, but you must always fully disclose any health problems.

There have been complaints that some plans do not cover stress or back problems – common conditions that can result from time off work. Find out what the insurer’s stance is with the policy you are offered and remember that if you do claim you may be required to produce evidence from a medical specialist such as a consultant.

Finally, normal pregnancy is not covered under PPI.

Is there an alternative to PPI?

If you are primarily concerned about being unable to work through ill health, then you may want to consider an income protection policy. This is different from payment protection because it pays a percentage of your earnings – usually around 60% - until you are able to return to work. Unlike PPI which only pays out for a limited period, income protection could pay until retirement age if you do not recover.

But, income protection is only protection against ill health or disability, not unemployment. One option is to buy an income protection and to top this up with stand-alone unemployment cover. Again, a specialist broker or intermediary may be best placed to advise on this.

For further information on Payment Protection Insurance please contact an insurance broker. Click here for more details.

Click here for ABI Guide to PPI

Peter Staddon
Head of Technical Services