Payment Protection Insurance (PPI)
Payment protection insurance (PPI) is sold alongside credit products, such as mortgages, loans and credit cards. It can offer valuable peace of mind to borrowers but many people have discovered, when attempting to claim, that PPI policies may not pay out. This guide explains how PPI works and whether you need payment protection insurance.
In theory, Payment Protection Insurance does what it says on the tin. It insures the repayments on most kinds of borrowing; including mortgages, credit cards, personal or secured loans or hire purchase agreements. However, PPI will only pay out if you cannot meet these repayments through no fault of your own - for example, if you lose your job or have to stop work as a result of an accident or illness.
In such events, PPI will pay out the level of cover arranged, typically for up to a year. Some policies, but not many, also include life cover so will also promise to repay your entire outstanding loan if you die before it is paid off.
The way PPI is charged will depend on the type of credit you want covered and where you buy it from. If the borrowing constitutes 'continuous credit', such as credit cards, mail order or overdrafts, PPI will be charged on a monthly basis.
If the credit is for a fixed term, such as a personal loan or a hire purchase agreement, it may be charged as a 'single premium'. As its name suggests, single premium PPI is paid in one go and upfront. The lender calculates what you owe on the insurance over the whole term of the loan - five years for example - and this sum is then added onto what you are borrowing.