The Financial Services Authority (FSA) has been looking into how loan providers, like some of the biggest banks and building societies in the UK, sell Payment Protection Insurance. And it makes a lot of money. Lenders make more than £1 billion a year from selling PPI, as it is called.
PPI is meant to protect borrowers by paying their monthly loan payments if they lose their job or can't work because of an accident or illness. A lot of lenders sell the insurance along with the loan, and about half of the people who get loans agree to buy the insurance.
But, according to the Department of Trade and Industry, only 4 percent of people make a claim, and of those, 25% are turned down. This may be partly because the FSA looked into it and found that about half of the lenders they talked to didn't tell customers about the details and exceptions or make sure the insurance was right for them. The investigation reportedly doesn't find that lenders are forcing people to buy the insurance, but the insurance was often added automatically to loan quotes without it being made clear that it was optional.
Even worse, some lenders don't tell borrowers that the cost of the insurance for the whole loan period is added as a lump sum at the beginning instead of as a monthly payment. This means that the borrower can't get rid of the insurance without paying off the whole loan and getting a new one.
And, hey, some of these lenders sure know how to charge for PPI. Simon Burgess, the Managing Director of British Insurance Ltd, says that one of the big high street banks usually charges GBP30 for every GBP100 of insured loan. He says that if these things were bought separately on the internet, they would cost between GBP4 and GBP6. Price comparison service uSwitch agrees with this point of view. It says that getting PPI from a bank can raise the amount you pay for insurance by almost 500%.
Take one case. Last year, a high street bank charged GBP5,150 for PPI on a GBP16,000 loan. The cost of PPI was then added to the loan, bringing the total amount to be paid back plus interest to GBP21,150. This meant that about GBP70 of the GBP300 monthly payment went to pay for the insurance. You can get similar insurance on the Internet for about GBP20 per month, and you can cancel it at any time without being charged.
So, what can we learn?
If your lender offers PPI coverage, ask how much your monthly payment would be with and without PPI. So, you can see how much PPI really costs.
Find out if PPI is added to the loan as a lump sum at the beginning. If it is, stop!
Compare prices from different places. If you look for "Payment Protection Insurance" or "Income Protection Insurance" on the Internet, you will find a lot of sites to try.
Check to see what the terms of the insurance are. Check out the exclusions that can make a claim invalid. For example, some policies say that you have to work at least 20 hours a week for at least 6 months before you can file a claim. Most of the time, seasonal or temporary work is not included. When you buy the insurance, you must be in good health, have no knowledge of a disability coming up, and not know that you could lose your job. Could you fall into one of these exceptions? If that's the case, the insurance won't help you at all.
Don't throw away your money. PPI insurance is a good idea as long as the cost is low and the contract can be cancelled every month. After all, your life could change. Then, look at what the policy doesn't cover to make sure it's right for your situation.
