Payment Protection Insurance

If you are entering into loan commitments you may wonder how you'll be able to make your monthly repayments in case negative change of personal circumstances takes place. You can be urged to protect your loan by taking out Payment Protection Insurance (PPI) which usually comes as an add-on to the loan. This type of insurance generally covers a minimum repayment against the loan for a specified period provided all the necessary criteria are met. In case of an accident, long term sickness or redundancy you could be given a tax free sum of money each month with which to make your loan repayments.

Disadvantages of PPI:
•    If it comes with a personal loan or any other finance deal, PPI is generally sold as a ‘single premium’ policy, which the cost of the insurance is added to the amount you've borrowed. In other words, you end up paying interest not only on your loan, but also on your insurance premium. For instance, adding PPI to a £8,000 loan for the period of five years could cost an extral £3000.
•    Since the term of most PPI policies doesn’t exceed five years, if your loan term lasts for longer than this, you will have to pay interest on insurance that is no longer valid.
•    Due to a great number of exclusions, there is no guarantee that you will be given any money if you make a claim. For instance, if you have a medical condition (even if it is minor) at the time you take out the insurance, it will not cover anything that can be related to that condition.
•    In case you're on a short-term deal, or self-employed, you are not likely to be covered for any redundancy claim.
•    Although there are strict rules that any company selling a PPI policy is obliged to meet, mis-selling is a huge problem. Despite numerous warnings made by FSA, many companies are still failing to treat customers fairly.
•    Normally, most PPI policies don't pay out for at least a month, and some may delay payment for several months.

In case you already have PPI, you can try to avoid PPI-related problems:

•    If you decide to remortgage, review your PPI policy. If your loan amount is increased, it would be reasonable to increase the insurance cover.
•    Even if you haven't increased the size of your mortgage, you may find a cheaper policy.
•    Since the PPI policy doesn’t pay out immediately, you should have a contingency fund to pay the bills until you are given money.
•    If you become redundant, visit your local job centre straight away to inquire whether you are eligible for JSA or income support. There is no possibility for you to trigger a PPI claim until you sign on, even if you don’t meet the eligibility criteria. You might be offered other benefits such as discounts on your council tax or assistance with your mortgage interest.
 


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