Why banks love payment protection insurance

Why banks love payment protection insurance
Well, maybe, maybe not. Payment protection insurance (PPI) is a favourite of high street bank financial advisers and insurance salesmen across the country. Why? Simple. It is overpriced and hard to claim on, so they make an absolute fortune from selling it to you. Paymentcare estimated last year that of the £4 billion spent by borrowers on PPI every year a massive £2.5 billion is stripped out immediately in commission payments – they know they aren’t going to need it to pay claims.
The idea of PPI and MPPI - one of which you will be offered it every time you take out a mortgage, a credit card or a loan of any kind – is that if your circumstances change such that you are unable to repay your debt, the insurance will do it for you. The sales pitch will be that buying it is the sensible thing to do, that if you are made redundant, get very ill or have a serious accident you will need it.
Do you need PPI?
But even if you do need insurance you may find that PPI doesn’t fit the bill. It tends to come with a great many get-out clauses included - to the benefit of the insurer: you won’t be able to get a payout if you have a part-time not a full-time job, if you are self-employed, if you find you can’t work as a result of a health condition that was pre-existing or if you are working on a short-term contract. Many policies are also “any occupation” rather than “own occupation” meaning that they only insure you if you are incapable of working at any job rather than just at your own job.
You may also find that just because you think you have a serious illness doesn’t mean your insurers will. As Angus Maciver of Prudential pointed out in The Daily Telegraph last week “suffering from any of the big three – cancer, heart attack, stroke – will feel ‘critical’ to a consumer,” but now that diseases are diagnosed so much earlier than before and treated much more quickly a diagnosis won’t necessarily trigger a payout. Even if you think you might need some kind of income insurance this is not a good one to have. Only 4% of people who take out PPI ever claim on it and 25% of those claims end up being rejected. Look at it like that and it’s not much of a ‘safety net’, is it?
You may also not need insurance at all. Note that most employers (85%) offer more than the statutory sick pay: many pay your salary for six months or so after you become ill before reassessing things so you should be able to cover any loan payments from that. Furthermore, while if you are taking out an ordinary loan odds are you won’t have much in the way of savings (or I suppose you wouldn’t need the loan), if you are thinking of a big mortgage you really should have a good six months’ worth of income in a savings account to provide for emergencies anyway.
Why you should think carefully before insuring your loans
PPI is also outrageously expensive, particularly if you get it from one of the high street banks – they can charge up to five times the level of premiums of the discount insurance groups. The banks also often have a nasty habit of ‘frontloading’ the cost of PPI. They calculate the cost of the insurance but instead of demanding a monthly premium they simply add the full amount to the value of your loan and have you pay interest on the whole lot over the term of the loan. There’s no logical reason for this. It is just a way to get more money out of you.