Payment protection insurance

What is it?

Payment protection insurance, or PPI, is insurance that will pay out a sum of money to help you cover your monthly repayments on mortgages, loans, credit/store cards or catalogue payments if you are unable to work. This could be because you have an accident or sickness, or become unemployed through no fault of your own.

This means that the insurance company will pay the monthly repayments (or a percentage of them) on your behalf for a fixed period of time if you become unable to work. It is sometimes known as ASU (accident, sickness and unemployment) insurance, Account Cover or Payment Cover.

PPI can provide worthwhile cover against unexpected changes in your personal circumstances, but bear in mind its limitations and exclusions.

Where might you get it from?

You're likely to be offered PPI by the company when you take out a loan or credit agreement, but you don't have to buy it from them. You can buy it yourself separately from insurance brokers, including over the internet. Shop around to get the best deal for you.

PPI is useful, but you may not always want it or be able to claim on it when you need to.

What are the main features?

• PPI is almost always optional – you should not normally be refused a loan if you decide not to buy it.
• PPI only pays out for a set period of time, generally either 12 or 24 months.
• To claim on the unemployment part of the policy typically you must have been employed continuously by the same company for the last 12 months on a permanent contract.
• Check carefully if you are self employed and require cover – the policy may not cover you.
• You may not be able to make a claim for an illness you already have or have had before. Make sure you check this before you take out the policy. This will be called a pre-existing medical condition and can include any medical conditions you have, even if they haven't troubled you for a while.
• Stress or back complaints, and possibly other conditions, may not be covered, even if you can't work because of them. Again, it's worth checking before you take out the policy.
• You have a legal right to cancel the policy and get a refund within 14 or 30 days of taking it out.

What should you do?

• Think carefully about the risks you could face while paying back a loan, mortgage or credit/store card and whether taking out PPI would be to your advantage. If you had an accident that stopped you from working, would you have enough savings to be able to continue paying off the loan?
• Consider whether you have other insurance which already covers you (for example through your employer), or whether other types of protection insurance may be more appropriate.
• Don't be pressurised into buying it - you don't usually have to take out PPI to get a loan and you don't have to buy it from the same place you get your loan from.
• Check online forms when applying for loan or credit online. Sometimes PPI is selected by default and you will need to change this option if you don't want to buy it. You should also print out or keep copies of completed forms in case you need to complain or make a claim in the future.
• Find out whether the firm is giving you advice; if not, consider whether you need advice. Getting advice means that the firm should recommend a PPI or other policy that meets your needs.
• Find out whether the policy is a single or regular premium. If you buy a single premium policy you pay a lump sum of 3-5 years' worth of premiums in advance. This amount is added to the sum you borrow and attracts interest, so you'll be paying more over the long run.
• Think about what you would do when the claims payments stop and you are still unable to work. How would you pay the rest of your loan?
• Check to see what you will be covered for and what won't be covered – for example any exclusions relating to the nature of your employment or your medical history.
• Check what you will get back if you cancel the policy or repay the loan early.

Ask the salesperson to explain the terms and conditions of the policy and make sure you read the Policy Summary document – especially the exclusions.

More information

What does PPI cover?
What the insurance covers will vary depending on the sort of repayments the policy is designed to protect, and on the terms of the particular policy.

The following benefits are typical for different types of PPI cover:

Mortgage – The insurance covers your monthly mortgage repayments for a set period of time. The maximum number of monthly repayments that the insurance company will make is usually 12, but it can sometimes be 24. This means that after this period you will have to pay your monthly mortgage repayments yourself.

Credit and store cards – The insurance will generally pay off a percentage of your outstanding balance or the minimum payment each month for up to a year. Check which option is being offered. This means that you may still have to pay any balance left after this time.

The insurance typically only provides cover for the amount you owe when you make a claim, and not any balance you build up after this.

Loans – The insurance will cover your monthly repayments for the loan – generally for 12 or 24 months. After this period you will have to pay your monthly loan repayments yourself.

If the insurance for any of these products contains life insurance, then the cover will generally pay off the balance of the debt covered if you die. If the claim is for disability, the monthly repayments may be paid to the end of the life of the loan.

How will I know what I'm covered for?
You should read the Policy Summary and policy document that come with any policy you take out. We require firms to give you a Policy Summary with this sign .

This sets out, amongst other things, the main features and benefits of the policy as well as any significant or unusual exclusions and how long the cover lasts. If unclear ask the salesperson to go through it with you and make sure you're happy before you take it out.

How much will it cost?
Remember interest rates and APRs for loans, mortgages and credit/store cards do not usually include the cost of the PPI policy, so comparing interest rates on their own will not be helpful if you are taking out PPI.

The salesperson must tell you how much the insurance will cost you separately from the costs of the loan. You can pay by a single upfront premium, or regular monthly premiums. The single premium can be added to your loan, thereby increasing what you borrow. A regular premium is a set amount you pay each month.

The salesperson is likely to quote you a monthly figure for the PPI whether they're quoting for a single or regular premium. If you take out a single premium bear in mind that, as it's normally added to your loan, you're being charged interest on that as well. This example shows how much more a single premium may cost.

A regular premium may be cheaper because you will not be charged interest.

If in doubt, ask the salesperson to clarify what sort of premium they are quoting for.

What's in the small print?
Like all insurance, PPI policies will generally include a number of exclusions or conditions that will prevent you from claiming on the policy. Make sure you understand which illnesses are not covered – see below. Also, you may not be eligible to take out a policy in the first place – say, if you:

• are under 18 or over 65;
• work less than 16 hours a week;
• are employed on a temporary or contract basis;
• are aware you may become unemployed;
• have an existing illness; or
• have stress or backache.

If in any doubt, ask the salesperson to explain any parts of the policy that you may not be able to claim on (the exclusions and eligibility conditions). Be sure you understand the exclusions before you buy the insurance.

I have an existing medical condition. Will I be able to take out PPI?
Yes, but you will not typically be able to make a claim for a medical condition you were aware – or should have been aware – existed at the time you took out the policy, or sometimes earlier. You would normally be able to claim for other illnesses that occur after you take out the policy. Make sure you read the exclusions to the policy.

Do I have to take out PPI and what would happen if I didn't?
No. If the firm insists on PPI cover to get the loan, you should consider whether you really want to take the loan with that lender.

Think about the cost of PPI and the amount that will be paid out if you make a claim on the policy. Check whether payments from a PPI policy would affect the benefits that could be paid from any other protection insurance that you already have.

If you don't take out PPI think about how you would pay the loan, mortgage or credit/store card payments if you were sick or had an accident and were unable to work or became unemployed. See our Insurance section for alternatives to PPI.

Can I cancel the policy if I change my mind?
You can cancel the policy within either 14 or 30 days of taking it out, depending on the terms of the policy. But the firm can charge you for the time you were covered and the cost of selling the policy. Read the Policy Summary, which explains the cancellation period.

If you have a single premium policy and you cancel after this initial cancellation period, you will usually find the refund you get is not in proportion to the remaining policy term. So you could get less back than you might expect.

Check with the salesperson or in the policy documents what refund you would get and how it would be calculated. See Payment protection insurance – Refunds of single premiums for more information.

Will I still have to pay for PPI cover if I terminate a car loan?
On some occasions you may owe money for the PPI you bought to cover a loan, even if you repay the loan early. For example, this would apply if you take out a loan to pay for PPI at the same time as taking out a hire purchase (HP) agreement – or loan – to buy a car. If you terminate the HP agreement for the car early you may find you still owe money on the PPI.

I bought PPI with my loan or credit when I applied online, but I didn't ask for it – what should I do?
Some firms offer PPI to customers when they apply for their loan or credit online – and this is sometimes selected by default on the forms. If you bought PPI in this way but didn't ask for it you should follow the complaints process below.

For more, general information about PPI see A guide to Payment Protection Insurance from the Association of British Insurers.

What should I do if I have a complaint?

If you have a complaint about the PPI you have been sold, you should first complain to the firm that sold you the policy, to give them a chance to put things right. If your complaint is about a claim, you should complain to the insurance company. If you're not happy with the outcome you may be able to take the complaint to the Financial Ombudsman Service – see Making a complaint.

For more information from the Financial Ombudsman Service, download their Payment protection insurance factsheet.

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