The Truth About Payment Protection Insurance (ppi)

By: Michael Morgan

Payment Protection Insurance or PPI is loan insurance designed to protect your Mortgage, Credit Card and Loan payments in the unfortunate event that you cannot work because of an accident or sickness, or if you have been made unemployed.

Like a career criminal, PPI has many names and aliases, such as Accident, Sickness and Unemployment (ASU), Life & Accident, Sickness and Unemployment cover (Life & ASU), Mortgage Payment Protection Insurance (MPPI), Personal Loan Protection (PLP) or Credit Card Repayment Protection (CCRP). Policies are usually sold when a consumers applies for a credit card, loan or mortgage, although 'stand alone' policies which are not linked directly to a specific credit product are also available.

In theory, making provision for maintaining your loan repayments if you cannot to work is a laudable financial planning aim and there is nothing inherently wrong with PPI. It can be highly beneficial to many consumers who specifically need protection in case they are unable to work, helping policyholders avoid defaulting on their loans and possible repossession of their home.

Like all insurance products, the devil is in the detail. PPI is riddled with clauses, limits, exclusions and exemptions, which preclude claims about many common causes of absence from work, such as back ache, stress or depression. In addition, consumers who are self employed, on short-terms contracts and agency work are not usually covered. As a result, 1 in 4 of all claims made under PPI policies are rejected by the insurer, due to exclusions and limits in small print of the policy.

In addition to strict policy exclusions that made the policy useless for some consumers, PPI sold by lenders together with Loans, Credit Card, Mortgages and on high-street or catalogue "Buy Now-Pay Later" deals offer extremely poor value for money and are exceedingly expensive when compared to 'stand alone' policies. Consumers who needed and were eligible for PPI would have been better off shopping around to get a policy from a 'stand alone' provider, which can be less than 15% of the cost of policies arranged by the lender. Recent research by MoneyFacts revealed NatWest PPI added ?3,267.60 to a ?10,000 loan, whilst a similar 'stand alone' policy provided by British Insurance costs only ?468.

Selling PPI alongside every application for credit has become common practice in recent years. The Citizens Advice Bureau (CAB) estimates there are over 20m PPI policies in existence, with over 7m being sold each year. Therefore if you have taken out some credit in the last few years it is likely that you have a PPI policy, although many consumers don't actually realise they were sold this insurance or realise how much it is really costing them.

It is not surprising that lenders train their staff into selling PPI at every opportunity, rather than advising their customers according to their needs and circumstances, as industry insiders state 17% of some high street lenders total group profits came from the sales of PPI. A recent report stated only 20 per cent of the money collected in PPI premiums is returned to policyholders who claim, which means insurers and lenders keep about ?4bn of the ?5bn paid in premiums annually, making PPI the most profitable type of insurance to sell. The Competition Commission has revealed that lenders can make a staggering 982% return on their costs by selling PPI.

The Competition Commission issued a report into the 'Profitability of PPI' on 28th January 2007, stating "The personal loans business has suffered from declining profits in recent years, to the point where in 2006 it appears to have been loss-making before taking into account income from PPI." It is clear therefore that selling PPI is essential to arranging loans.

As with other financial products, the major problem lies with how the policies were sold and whether the insurance was suitable for the consumer. Many policyholders have been sold PPI when they had no chance of successfully claiming under the policy, as they had been to the doctors several times with a stiff knee or they had not been employed on a permanent contract. In most cases, the salesperson simply did not ask their customer about their circumstances, which explains why we regularly deal with complaints from foreign residents, people on state benefits and full time students.

According to our experience, most consumers were not made aware of the alternative 'stand-alone' policies, or the various policy exclusions. Some were told that they would improve their credit rating, receive a lower interest rate or be more likely to be accepted. In some cases, the customer was told it was compulsory or didn't even realise that they had been sold PPI.
One of the major inconsistencies with PPI are Single Premium policies. A Single Premium PPI policy is where the whole cost of the insurance is added as a lump sum to the amount borrowed, so you're effectively borrowing more initially, which then must be repaid over the term of the loan plus interest. This makes Banks an extra 10-18% per year in interest (See Competition Commission report) and makes little allowance if you wish to repay the loan.

It is no wonder that the Citizens Advice Bureau (CAB) have called selling of Payment Protection Insurance a 'Protection Racket' and the head of the Office of Fair Trading (OFT) has said "Many customers are failed by payment protection insurance, which gives them a poor deal and often less protection that they think." The prevalence of such sales tactics has resulted in one industry analyst estimating that upto 70% of all PPI policies were mis-sold.

The good news is that consumers who have been mis-sold PPI can claim a refund and Victory Claims Ltd are specialists in handling complaints about financial products such as Payment Protection Insurance. If you have a PPI policy and would like to know how to start your claim, visit www.victoryclaims.co.uk/PPI_Home.html, call 0871 218 1206 or email michael.morgan@victoryclaims.co.uk.

Victory Claims Ltd (www.victoryclaims.co.uk) is a Professional Complaints Handling Company that helps consumers secure redress from financial institutions for losses suffered as a result of the advice they received. Victory Claims Ltd is regulated by the Ministry of Justice in respect of regulated claims management activities. Our registration is recorded on www.claimsregulation.gov.uk. We are also registered with the Information Commissioner to ensure security & confidentially of your personal information, under the Data Protection Act.

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