Payment Protection Insurance (PPI): A False Sense of Security?

March 9, 2008 By Debbie Dragon

Do you know what Payment Protection Insurance (PPI) is?  Most often, it’s an insurance program sold with a mortgage that is meant to cover your payments in the event you fall ill or are unable to work.  It’s considered a voluntary debt cancelation program, however, some loan providers make it a requirement for borrowers to purchase PPI coverage in order to get approved for their loans.

The amount of money a person would pay for their PPI coverage is based on the amount of the loan; and is often just added into the monthly payment.  There are other forms of payment protection insurance which are meant to cover bills other than mortgages, including credit cards and car payments, if you cannot work.

Payment Protection Insurance sounds great in theory- but a study by Citizens Advice (a national charity organization) shows that 85% of people who tried to put in claims under their PPI coverage were unsuccessful.

PPI policies that are sold by several well-known mainstream lenders exclude coverage for several of the more common problems which may keep people from working, things like mental issues or bad backs.  There are even PPI policies with age limits; and that exclude people who are self-employed.

When people have been able to successfully make a claim under their PPI insurance, the amount of money that was paid out does not usually keep the individuals free from debt- particularly for credit card PPI coverage.  In many cases, payment protection insurance only pays over a period of a year- but does so with minimum monthly payments so, for example, a borrower who is able to claim payments from their PPI policy on a $1,000 credit card account would see their entire debt reduced by about $12 over the course of the year!

Citizens Advice Chief Executive David Harker said, in an article for CitizensAdvice.org.uk:

“Payment protection insurance is sold to borrowers with the promise of peace of mind and reassurance that credit repayments will be covered if they fall on hard times.  People are lulled into a false sense of security, only to find that far from providing protection against an unexpected drop in income, PPI often just adds to their debt problems.

“At best the excessive cost for minimal benefits makes it bad value for many people; at worst mis-selling means the most vulnerable people are parted from large amounts of money under false pretences and left even more exposed to debt.  This is particularly worrying at a time when personal debt levels are escalating.

“These problems are not new – we first reported on them ten years ago.  It is a scandal that in this time so little has been done to remedy them. Selling PPI is big business, and this insurance does not come cheap, so it is high time the industry developed good minimum standards of cover.  We badly need an official investigation of how this market is operating, leading to effective regulation that ensures a fair deal for all consumers, and which also protects the most vulnerable.”

Turns out that many lenders are offering the Payment Protection Insurance coverage to people who simply wouldn’t qualify if they attempted to put in a claim.  Before you agree to purchase PPI policies, be sure you qualify for submitting claims, and that the policy will cover the entire debt (rather than make minimum monthly payments for a specified period of time).

Insurance can protect you from many things. In fact, you can get insurance for just about everything these days, from your car, to your home, and even your pets. Finding affordable insurance quotes that work for you, is the first step.

Posted in banks, borrowing, debt, family, financial plans, financial problems, fraud, insurance

• Credit Cards Suck! You head off to college.  You're finally on your own truly feeling like an adult for the first time.  As you head to the cafeteria you pass a table run by a credit card company. ...
• Credit Card Debt Full Of Forgotten Items The following exercise will be enlightening to those deep in credit card debt, entertaining to those not in debt, and a cautionary tale to those too young to have experienced it. If you are in...
• Is Credit Card Insurance a Scam? The following guest post is from Tisha Tolar.  Tisha is a freelance writer providing content for CreditCardAssist.com, where she regularly writes about credit cards, rewards programs and general consumer finance issues. Credit cards certainly are...
• 5 Types of Credit Card Users - Credit Card Company Perspective The topic of credit cards is one that elicits varied responses from individuals based on their personal experiences with them. In my opinion, there are many good things about credit cards. Others, however, feel the...
• Using Credit Cards to Make More Money When it comes to credit cards, most of us think of them as a way to get things we really want right now. We may not actually "need" these things, but we sure do want...