Dec
18
Payment Protection Insurance: Peace of Mind - Until You Make a Claim
Filed Under Payment Protection Insurance
Whenever you take on any sort of credit, you are guaranteed that someone will try and sell you payment protection insurance.
A car loan, mortgage and your credit cards - borrow money and you will be subjected to someone in full-on selling mode extolling the virtues of their payment protection policy. You can’t escape it. What would happen if you lost your job? What if you had an accident? What if you died? And we all know about Sod’s Law. If you turn your nose up at it now, you are just begging for disaster to befall you.
The problem is most payment protection insurance is ill-fitting. It won’t do the job for which it was intended, because you are not the type of person the insurance company will pay out to. Some might argue that would be anyone who makes a claim, but that would probably be unfair.
No, each policy has a myriad of clauses. Little caveats that mean that the policy doesn’t actually apply to you. The cover that is supposed to pay out in the unfortunate case of unemployment, well there are a few loopholes to benefit the insurance company on that issue.
Those loopholes are all listed. Listed in print small enough to make a nanobot look monolithic in comparison, but it is there. You signed the paperwork, you should have read it.
- Casual worker? Unemployment cover doesn’t apply.
- Had a short-term contract? Cover doesn’t apply.
- Knew you were going to lose your job prior to taking out the insurance? Cover doesn’t apply.
- Self-employed and closed down the business but didn’t go bankrupt? Cover doesn’t apply.
The sickness cover is not much better.
- Existing conditions? They can’t be claimed against.
- Something new caused by an existing condition? Sorry, claim denied.
- Died as a result of existing conditions? Guess what? Claim denied.
And that’s not even the half of it.
It goes on. Take Mortgage Payment Protection Insurance - ASU to some. Since the Government changed the rules on paying mortgage interest to those on benefits as of October 1995, you are pretty much trapped into taking out such cover. If you got your mortgage after that key date, you have to wait nine months before the Income Support Mortgage Interest (ISMI) benefits start being paid. If you are in rented accommodation then housing benefit will start straight away.
But bank loans are where the real rip-offs seem to take place. A year or two ago many well known lenders had a nice little wheeze going. They offered unsecured loans with two different interest rates applying. One rate for those who just wanted to borrow the money and a second, much lower rate, for those who took the loan with the attached Payment Protection Insurance.
As the Consumer Credit Act rules stood then, the lenders could get away with quoting the APR on those loans excluding the insurance part. Even though one was conditional on the other. The insurance, in the meantime, was . . . well let’s just say uncompetitive.
There was an outcry from consumer groups, debt counsellors and money advisers and the Office of Fair Trading stepped in. The law was laid down. Now if insurance is a obligatory part of the deal, as was the case here, the cost of the insurance becomes part of the APR calculations - so now the consumer can see the true aggregate cost. As a result of the OFT this particular strategy was wiped out overnight.
But payment protection insurance, of benefit to the borrower or not, is still being sold. Prices for such cover vary horrendously. And the ethics applied by the salesman are equally diverse, as could be argued their knowledge. The Financial Ombudsmen Service, in it’s April 2001 edition of Ombudsmen News, said about loan payment protection insurance,
“The people who sell this type of insurance are often not specialists in this field and some have little or no knowledge of the policy terms. Their ‘advice’ will therefore not be of great assistance to borrowers, who may be uncertain what they are paying for and unable to judge whether it is suitable for them”.
On top of all this we have the way payment protection insurance is added to the cost of your loan. The majority of people still think that taking out Payment Protection Insurance with your loan is like taking out life insurance. You are paying for it monthly and can therefore stop at any time. WRONG.
The cost of the cover over the life of the loan is calculated up front … as a large, typically four figure, fee. This huge sum is then lent to you by the lender, usually a bank, and then spent on the insurance. You never see the money, but you now owe it.
This makes getting out of the policy very difficult in deed. You are now dealing with two companies. Again a fact that surprises a majority of consumers. One company is the lender. The other is the insurance company. The first may actually own the second but they are two different corporations to deal with should you wish to repay the loan early. And you could well end up facing the favourite scam of the banks, the Rule of 78, into the process . . . but that’s another story.
This set up also provides protection for those ‘individuals’ at your local bank who knowingly sell you ill-suited payment protection insurance. But the current rules allow them to circumvent any moral obligation to do what is best for you and just concentrate on making more sales and generating bigger commissions.
All these factors together mean that the person who pays is you. Payment protection insurance is a serious consideration. But you have got to ensure you know everything up front. And shop around. You don’t have to take it from your lender. Chances are it is cheaper if you get it elsewhere. There are plenty of brokers who will be able to help you arrange standalone income protection cover. And if you fall into the “unemployment cover doesn’t apply to me” group, you can get just the Accident & Sickness part of ASU and leave it at that.
Remember, Payment Protection Insurance can give you peace of mind . . . at least up until you make a claim.
