Money tip #111 – Avoid taking out Payment Protection Insurance (PPI)

2 min Read Published: 04 Nov 2010

Payment Protection Insurance (PPI) is in theory meant to cover your debt repayments should you become unable to meet them due to ill-health, an accident or becoming unemployed.

While this sounds like a good idea in principle the reality is very different. PPI is hideously expensive and hardly ever pays out in the event of a claim. According to Which? only 11% of PPI claims are successful while only around 20% of the premiums collected by the insurers ever get paid back out as claims.

Consequently, PPI is a huge money spinner for the insurance industry generating around £5billion a year in profits. There has been huge controversy over these policies with customers being overcharged collectively around £1.4billion a year. It has been estimated that over 2million of such polices have been mis-sold raising concerns from the Financial Services Authority (FSA) and a ban on single premium PPI contracts.

So why should you avoid PPI?

  • As stated above PPI is expensive. PPI can end up adding around a third to the amount you initially borrow. I can personally vouch for this. Many years ago I took out an American Express credit card and unbeknown to me PPI had been included under the terms of my agreement. I don't recall ever asking for PPI as I'm well aware of it's shortcomings. Once I found out about this stealth PPI I discovered that it accounted for almost third of my monthly repayments. So while I thought I was repaying my outstanding debt – in reality I wasn't. Check that you are not paying for unwanted PPI.
  • Another reason to avoid PPI is that you are unlikely to be successful if you try to make a claim. Obviously there will always be someone who has benefited from this type of policy but unfortunately they are the exception and not the norm.
  • PPI often has exclusions for pre-existing medical conditions. So excluding the most likely cause for you to make a claim!
  • The PPI cover normally lasts for only a few years. So if you have not paid off your debt by the time the PPI expires you could find yourself no longer covered yet still paying premiums. Amazing!

Is there an alternative to PPI?

Income Protection insurance will pay you a percentage (normally 50%) of your earnings tax-free each month should you become unable to work as a result of an accident or ill-health (but not unemployment), until such time as you are able to return to work or the policy expires whichever is sooner. This would not only help pay your monthly debt repayments but help meet other living costs. So you may want to consider this route but admittedly it is not cheap.

Also build an emergency savings fund. As a guide it is often recommended that you tuck away 3-4 months salary into a savings account to help overcome life's unexpected surprises, such as losing your job.