Payment Protection Insurance: do you need one?

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PPI or Payment Protection Insurance is the type of a policy that was designed to protect both borrower and lender from the situation when the borrower cannot make loan’s payments. That situation can result from the policyholder’s disease, permanent or temporary disability or death. All these circumstances become the reason a person cannot earn their usual salary and so are unable to serve the loan.

PPI is also known as accident and sickness Insurance, or card cover. PPI becomes a great tool that protects you (especially if you are a head of the family and you have dependants) from financial hardship caused by a sudden disease, injury or other states that makes it impossible for you to earn the money.

PPI mostly covers mortgage payments and credit cards monthly payments, as lenders do not care about your physical state and only care about your financial commitments. The policy lets you make payments instead of going bankrupt due to loans repayment failure.

How does Payment Protection Insurance work?

There is a common myth, preventing many people from buying a PPI: they complain it’s not easy (or impossible at all) to get money compensation on PPI policy as Insurers make everything to avoid payments to policyholders. Well, that not true.

Payment Protection Insurance

It is critical to tell everything about your health state to your Insurer prior to getting a policy. If you’ll miss something, even seemingly not important, that could really become a reason your policy will not come to effect if the Insurer finds you didn’t notify him about some of your health issues.

So, here is the list of Insurable events for Payment Protection Insurance:

  • a person becomes ill and unable to go to regular work and so has no means to keep paying for loans;
  • a person has been made redundant;
  • an accident happened to a policyholder and it will take time until a person recovered and able to earn the money (and pay his loans back);
  • a situation where a policyholder is forced to stop working due to the need to take care of their relatives/child/spouse;
  • a person is suddenly diagnosed with the critical illness (or deadly illness in terminal stage), so it is impossible for him to return to work.
  • death of a policyholder, so his/her relatives of co-signers can make payments from the PPI coverage.

Attention! PPI does not cover the following:

health issues

  • First 3 month of a policyholder’s disability. During the first 90 days a person should cover outgoings from his own pocket, so one cannot rely on PPI solely.
  • Some diseases PPI doesn’t cover as well and the number and types of illnesses vary from Insurer to Insurer, so check it in your policy.
  • Illnesses that you already have and know about (pre-existing conditions). If you know about your pre-existing condition and hide it from the Insurer, there are almost 100% chances it’ll be revealed sooner or later and you will not get any compensation on your PPI policy when you will really need it. Not telling everything to the Insurer is the main reason why policies don’t come into effect when it is most needed.

With what types of loans PPI goes the most often?

  • Mortgage loans – loans for buying property (a house) – it is highly recommended to buy a Payment Protection Insurance and Income Protection Insurance for home loans.
  • Car loans (and other types of vehicles).
  • Credit card and most of the types of short-term consumer loans

Types of PPI

Depending on the circumstances that are likely to happen the most or the situation that has a potential to affect your well-being the most, you may choose the more suitable type of Payment Protection Insurance.

PPI

  • STIP (Short-term Income Protection Insurance) is purposed to cover your most important expenses during quite a short period of time (usually up to one year). It works the best for temporary diseases when a person has high chances to recover and get back on track fully (means the person will keep earning the same money he did before the disease or trauma).
    STIP costs cheaper due to its short period effect, but there is a con: if a disease will appear to be more serious than expected and a person will not be able to earn money after a one-year term, this policy will not help.
  • IP (Income Protection Insurance) covers a significantly wider range of cases related to the inability to make payments on borrowed money and therefore the policy is more expensive than the STIP one.

To be exact, these two types of Insurances are not the types of PPI but rather separate Insurance products that protect borrower, while PPI is purposed to protect the lender.

The scandal aboutbeing mis-sold to millions

PPI

It is a well-known case where it turned out that millions of PPI policies were sold to citizens without them being aware of it. As PPI is purposed to protect a lender from a borrower’s inability to make payments on a loan, lenders were including PPI into a loan’s Agreement without notifying clients. In a major of cases lenders were telling to borrowers that PPI is mandatory to buy. It turned into a real juridical scandal when millions of people started to claim their money paid for PPI back.

So, before signing a loan’s contract, make sure you are not buying a PPI along with that, or if you are buying a policy, make sure it is exactly the type you need.

Summary

Protection Insurance

Payment Protection Insurance is a great option that can save you from bankruptcy in a case you will temporarily be unable to earn the money and make loan’s payments. The policy will cover your payments to a lender while you are recovering from disease or temporary disability.

At the same time, you don’t need to pay for PPI policy if you have family that will support you financially if an accident or a disease will happen.

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