Payment protection has been viewed by some consumers and financial services commentators as a good choice for people taking out loans, credit cards and other forms of credit. But was it ever a good idea? I take a look at what it is, the pros and cons and how some people are now able to claim back what they’ve paid on payment protection due to how it was sold to them in the first place.
What is Payment Protection Insurance?
Increasingly towards the peak of the credit market, people had growing concerns about taking a loan or a credit card, in case their personal circumstances changed. Most institutions offering loans or credit of any sort would offer people Payment Protection Insurance, which is an insurance policy that would pay out a sum of money to help cover your monthly repayments on mortgages, loans etc if you are unable to work for certain reasons covered by your policy, such as death, illness or accident, or you become unemployed through no fault of your own.
Sounds like a sensible thing to consider – was it expensive?
That depends on exactly what the policy was to protect - for a personal loan, the cost is approximately 10% of the loan repayment; for credit cards it varies from card to card, but 70 cent per €100 outstanding on the card per month is average. So if you have an outstanding balance of €10,000 on your credit card you will be paying €70 per month for your payment protection policy, on top of the interest charges you are also paying. As most PPI policies will only pay out the minimum repayment on the card's balance for a duration of 1 year maximum, a card with a €10,000 balance and a minimum repayment amount of 1% per month would have a monthly repayment amount of roughly €100. That makes the cost of the PPI pretty steep in my book.
If you are thinking about getting PPI for your credit card, check the minimum repayment % of your balance which is required per month before committing yourself. And if you ever want to cancel, you can do so at any time, subject to your policy terms and conditions, so be sure to read them thoroughly.
What should people consider if thinking of taking out PPI?
Like all insurance policies, there are a number of factors to consider when taking out a policy. The general rule of thumb is to balance the ongoing cost of the policy against the likelihood of having to make a claim and how much more difficulty you would be in if you found yourself in the position where you would have made a claim but did not have insurance in place. If you are seriously considering PPI, get your bank or credit card company to fully explain the full cost of the insurance over the cost of the loan, or give you examples of how much you would pay for an average credit card balance that you would expect.
Also make sure that you fully understand the circumstances under which the policy will pay out – you might be taking insurance for an event that it will not cover.
What are the reasons that people take out PPI for?
Typical reasons people take insurance out would be to protect payments against unemployment, illness or death. and like all insurance policies, you must be accurate with the information you provide your insurer. The policy will not pay for example if you are aware at the time you take out the policy that you will be made redundant in the future. Likewise, for medical conditions, you must be up-front and ensure that you let your insurer know if you have an existing medical condition.
OK – that’s the warnings and the caveats – do they pay out?
If there is a legitimate claim made against the policy, there is no reason to believe that the claim will not be paid. One very important point to note is that there may be an upper limit to the amount the insurer will pay out, either in time or in money. For example, if you take PPI against your credit card and you make a valid claim, your policy may only pay out the minimum amount for up to 12 months. This is important to consider if you are thinking about taking this insurance out.
Why are we now seeing advertisements for people to claim back what they have paid out?
A new industry has emerged which exposes some cases where people took out payment protection insurance without it being fully explained, or in some cases where they did not need it at all. This industry has started to gain some notoriety with high profile TV and web campaigns offering a no win no fee basis for claiming back premiums paid out and in some cases getting damages.
Should we trust these guys?
It’s a difficult question – if you are to explore taking a claim, ask yourself if you knew what you were doing when you took out the policy. If you did, and you asked questions and were given reasonable answers, then the chances are that you won’t be successful with a claim. If on the other hand you found out retrospectively that you were paying PPI without expressly requesting it, then you may have a case. If you want to get in touch with someone to discuss it, you could make contact with the financial regulator, the NCA, or Citizens Advice Bureau. They may be able to help you with the basic question before you go down the road of hiring a claims expert to make a case against your insurer or bank.