Payment Protection Insurance Is It Worthwhile
Below is a MRR and PLR article in category Finance -> subcategory Insurance.
Is Payment Protection Insurance Worthwhile?
Overview
The Financial Services Authority (FSA) has been investigating Payment Protection Insurance (PPI) and how it's marketed to loan applicants in the UK. PPI has been a lucrative venture for many of the UK's largest banks and building societies, generating over £1 billion annually. But is it beneficial for borrowers?What Is PPI?
PPI is designed to cover loan payments if a borrower becomes unemployed or cannot work due to illness or accident. In exchange for a monthly premium, around 50% of borrowers opt for PPI when taking out a loan.The Concerns
Interestingly, data from the Department of Trade and Industry reveal that only 4% of borrowers ever make a claim on their PPI, and just 75% of those claims are approved. A major issue is that about 50% of lenders surveyed by the FSA don't fully explain the policy's terms and exclusions, leading borrowers to mistakenly believe the insurance is mandatory. Often, PPI is added to loan quotes without clearly indicating its optional nature.Additionally, some lenders add the total cost of PPI as a lump sum at the start of the loan rather than spreading it out over the term. This means borrowers cannot cancel the insurance without paying off the entire loan and securing a new one.
Pricing Practices
Simon Burgess, Managing Director of British Insurance Ltd, highlights that some high street banks charge exorbitant rates of 30 per £100 of loan insured, while online rates hover around 4?"6 per £100. This staggering disparity suggests banks may be charging almost 500% more than online competitors.For instance, in 2005, a high street bank quoted £5,150 for PPI on a £16,000 loan, increasing the loan to £21,150. Monthly repayments were £300, of which £70 was for PPI. However, a quick online search could yield similar coverage for about £20 per month.
Recommendations
To make informed decisions about PPI, consider the following:1. Request Quotes With and Without PPI: This allows you to see the true cost of insurance and make direct comparisons.
2. Avoid Lump Sum PPI: Ensure the PPI cost isn't added as a lump sum at the outset.
3. Compare Before Committing: Never accept the lender’s PPI without first checking other options. An online search for Payment Protection Insurance or Income Protection Insurance can provide multiple quotes quickly.
4. Scrutinize the Small Print: Exclusions like being a seasonal or temporary worker can prevent claims. Many policies require you to be in the same job for six months or to be in good health, with no known reasons that could prevent you from working.
Final Thoughts
For many, PPI may be unnecessary. If it suits your needs, find the best deal and ensure the policy can be canceled without penalties. Always read the small print to confirm you’re eligible to claim. Knowing these details prevents paying for a policy that might not benefit you.You can find the original non-AI version of this article here: Payment Protection Insurance Is It Worthwhile .
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