With the economic outlook continuing to worsen and with our average level of debt higher than ever before protecting yourself from the risks associated with debt is certainly a good idea. Payment Protection Insurance (PPI) has become the standard product offered with the financial services industry to serve this purpose.
What is PPI?
PPI is promoted as a means of ensuring that your debts are covered in case your circumstances change and you are no longer able to meet your payments. Illness, accident and unemployment are examples of situations which PPI would be advertised as covering.
What's the catch?
The most common criticism of PPI is that it is hugely overpriced. Prices vary widely between providers and the majority of financial service providers offering PPI do charge very high rates, often up to 25% of the cost of the actual loan being taken out.
PPI is also subject to very hard selling tactics. Banks are very keen on selling their customers as many products as possible in one sitting - a technique known as "cross-selling". Those selling loans often prey on their customers' fear of the risks they face when taking on debt to sell them an overpriced PPI policy.
PPI may also be added automatically to any loan enquiry you make. In a Which? Money mystery shopper exercise last year, out of 41 enquiries made about a loan 24 of the lenders approached automatically included PPI.
Added to the hard-sell is the fact that many lenders will add the cost of PPI to their customers' monthly loan repayments. This means that quite often consumers end up paying interest on the cost of their PPI as well. This extra interest is simply more profit for the lender.
Critics of PPI quickly follow accusations of overpricing and unethical sales tactics with facts about the low number of successful claims on this variety of insurance. Paymentcare, itself a PPI provider, published figures showing that borrowers spend around £4 billion a year on PPI payments. Of this sum, they claimed that £2.5 billion was immediately used for commission payments.
How could this be?
The providers know that they will not need this money to pay for claims. It has been estimated that only 4% of people paying PPI ever claim on it. Of these a large number appear to have their claims rejected. The banks and other lenders spend so much energy encouraging us to buy PPI precisely because it is a high earning product.
PPI is designed to limit the circumstances in which claims will be paid. A serious illness such as cancer may not qualify for cover if it is diagnosed early. The self-employed are rarely covered and even when a claim is paid the policy small-print may restrict payments to the minimum level or place a time-limit of one year on the payment cover.
Reaction to the rip-off
The Citizens Advice Bureau (CAB) lodged a super-complaint against the PPI market stating that it was often mis-sold to those who could not qualify for a claim, excluded many of the most common causes debt problems and that PPI is a particular problem for the most at-risk borrowers.
CAB chief executive David Harker said "At best the excessive cost for minimal benefits makes it bad value for many people; at worst mis-selling means that the most vulnerable people are parted from large amounts of money under false pretences and left even more exposed to debt. This is particularly worrying at a time when personal debt levels are escalating."
In response to this complaint, both the Competition Commission and the Office for Fair Trading (OFT) began investigating the PPI market in 2008. John Fingleton, then OFT chief executive, said "Despite some evidence of a degree of consumer satisfaction with aspects of the product, the evidence as a whole suggests consumers get a poor deal."
Alternatives to PPI
Before taking out PPI it is important to consider if you really need it. You may, in all likelihood, have some degree of income protection built into your employment contract in case of illness or accident.
If you are taking out a large loan or mortgage, ensuring that you have a good 6 months of income saved is a precaution worth taking. For smaller loans coming from your income, an insurance policy protecting your income may prove to be a better form of protection than an expensive PPI policy.