The Financial Services Authority (FSA) has launched an investigation into how Payment Protection Insurance (PPI) is marketed and sold by major banks and building societies across the UK. This scrutiny comes in response to concerns about the substantial profits from PPI sales, which reportedly generate over £1 billion annually for lenders. But the reality behind PPI sales is far from straightforward.
Key Points
What is PPI?
Payment Protection Insurance (PPI) is designed to safeguard borrowers by covering their loan repayments if they become unemployed or are unable to work due to illness or accident. Despite its protective intentions, the practice of selling PPI has raised significant issues. While about 50% of loan customers opt for PPI, a concerning 4% of claims are actually made, and a quarter of those claims are rejected.
The FSA’s Findings
The FSA’s investigation reveals troubling practices in the PPI market. The investigation uncovered that many lenders failed to adequately explain the details and exclusions of PPI to their customers. Furthermore, a significant number of borrowers were unaware that PPI was optional, as it was often automatically included in loan quotations without clear disclosure.
Some lenders even added the total cost of PPI as a lump sum at the outset of the loan, rather than as a manageable monthly premium. This practice means that borrowers cannot cancel the insurance without repaying the entire loan and negotiating a new one.
The Cost of PPI
Simon Burgess, Managing Director of British Insurance Ltd, highlighted the stark contrast in costs. High street banks often charge £30 per £100 of loan insured, whereas similar coverage purchased separately online costs between £4 and £6. Price comparison service uSwitch confirms that bank-sold PPI can inflate the cost of cover by nearly 500%.
To illustrate, last year a high street bank charged £5,150 for PPI on a £16,000 loan. This inflated the total repayable amount to £21,150, with £70 of each £300 monthly repayment attributed to the insurance cost. In contrast, equivalent insurance online would cost around £20 per month and could be canceled without penalty.
Tips for Navigating PPI
To avoid falling victim to these costly and misleading practices, consider the following advice:
- Compare Costs: When offered PPI, request the monthly premium cost with and without PPI. This allows you to see the true cost and assess whether the insurance is worth the expense.
- Understand Payment Structure: Check if the PPI cost is added as an initial lump sum or as a monthly premium. If it’s a lump sum, be cautious. This structure may lock you into the policy for the duration of the loan, making it difficult to cancel.
- Shop Around: Use online tools to compare PPI quotes. Searching for “Payment Protection Insurance” or “Income Protection Insurance” can lead you to more competitive options that are cheaper and offer better flexibility.
- Review Policy Conditions: Thoroughly examine the conditions and exclusions of any PPI policy. For instance, some policies require you to have worked continuously for six months at a minimum of 20 hours per week. Seasonal or temporary work is often excluded, and policies may demand you to be in good health without any knowledge of impending disability or unemployment.
- Assess Suitability: Ensure the PPI policy aligns with your personal circumstances. If the exclusions or conditions could apply to you, the insurance may not be beneficial.
- Seek Affordable Options: PPI can be valuable when obtained through affordable, monthly cancellable contracts. Always check the policy’s exclusions to ensure it fits your personal needs.
The Takeaway
Payment Protection Insurance is designed to offer financial safety, but its implementation by lenders has often been problematic. To protect yourself from unnecessary costs and ineffective coverage, be diligent in understanding the terms and comparing options. By doing so, you can ensure that your insurance provides genuine value and is suited to your financial situation.
As the FSA continues to investigate and address these issues, being informed and proactive about PPI will help you avoid costly mistakes and secure the best possible coverage for your needs.
