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What Is Payment Protection Insurance?

GoCardless
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Last editedNov 20212 min read

Whether due to unexpected illness or job loss, there are numerous reasons why you might struggle to repay debt. Payment protection insurance is designed to mitigate this risk, but it carries with it some negative historic connotations due to mis-selling. We’ll cover how payment protection insurance works below, along with its pros and cons.

Payment protection insurance (PPI) explained

Payment protection insurance, or PPI for short, is a type of policy designed to help consumers repay debts over a short-term, fixed period. It provides coverage for issues like accidents and illness, which is why it’s often referred to as accident, sickness, and unemployment insurance. Terms and conditions will vary, but most PPI helps policy holders meet specific monthly loan repayments over a fixed term.

In the past, PPI was sold as part of a package deal with financial products like credit cards, mortgages, loans, and car finance. The full premium was often added on to the total amount borrowed, with the borrower then paying off the premium over the loan’s term – with interest. These single premium policies were banned in 2009, so you’ll now pay monthly premiums instead.

How was PPI mis-sold in the past?

You may have heard of payment protection insurance claims being paid out for mis-sold PPI. While today’s lenders have stricter guidelines to follow when selling this type of insurance, there have been issues in the past.

Here are a few of the main reasons why payment protection insurance refunds have been issued:

  • PPI was sold without a signed agreement

  • PPI was sold without the borrower being informed of its purchase

  • PPI was sold as a mandatory add-on to a credit card or loan

  • PPI policies weren’t adequately explained to the borrower

These policies were often added on as a standard bundled product for any loan, without giving borrowers the information needed. In short, buyers didn’t understand what they were paying for. As a result, billions of pounds have been repaid in payment protection insurance claims.

How to claim a payment protection insurance refund

If you took out any of the following lines of credit prior to 2011, it’s possible that you were mis-sold PPI:

It’s worth looking over your past bank statements to see if you paid for payment protection insurance without knowing about it. While the FCA set a deadline of 29 August 2019 to resolve PPI complaints, you might still be able to launch a complaint with your provider under exceptional circumstances. You can learn more about these requirements on the Financial Ombudsman Service website.

What is mortgage payment protection insurance?

A similar product you might see advertised is mortgage payment protection insurance. So, what is mortgage payment protection insurance, and how does it differ from regular PPI? Both products are intended to help you repay debts in the event of unexpected job loss, accident, or illness. Mortgage payment protection insurance typically goes a step further by covering mortgage payments as well as a percentage of household bills. It’s targeted directly at homeowners, with longer lasting coverage.

Is payment protection insurance right for you?

While there have been issues with mis-sold PPI in the past, restrictions have been significantly tightened to make this a better regulated insurance product. Payment protection insurance can be a good idea for consumers who don’t already have loan protection insurance or critical illness cover. However, there are a few factors to keep in mind. The first is that PPI is very specific in its coverage. It will only cover one debt, whether it’s your mortgage, loan, or credit card repayment. Policies don’t kick in with immediate coverage either; you’ll first need to make payments throughout the deferred period.

As with any insurance product, it’s vital to read the fine print carefully. Pre-existing conditions won’t be covered, and some illnesses may be excluded. If you already have a sizeable savings cushion and illness coverage, you probably won’t need to take out a separate, debt-specific policy like PPI.

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