Payment Protection Insurance - More information – Part I

Continuing further from our previous article on PPI, here are some common questions that can be listed as FAQ’s for PPI or Payment Protection Insurance.

What does PPI insurance 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 keyfacts document.

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 or regular premium. 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.

Loan £2,000
Loan interest 200
Total loan cost £2,200

PPI premium £250
PPI interest 30
Total PPI price £280

Total cost of loan with PPI £2,480
Total cost of loan without PPI £2,200

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.

No comments: