Types of Payment Protection Insurance
Payment protection insurance is commonly taken out with a specific loan or credit agreement, it is there to cover repayments in the event of illness, unemployment or accident.
The 'safety net' that PPI is supposed to deliver activates between 1 and 6 months of the borrower not been able to service the debt for which it covers. Usually, the policy will then meet repayments for 12 months or until the borrower is able to pay them again (either by recovering or finding employment).
There are broadly 3 types of Payment Protection Insurance cover.
1. Accident, Sickness and Unemployment (ASU) polices, or Income Protection
Sometimes referred to as PPI, these tend to be standalone policies taken out separately and used to protect your debt repayments. This is generally regarded as being the 'safest' type of PPI, offering to pay a percentage of your earnings in the event of accident or illness, or in the case of redundancy (albeit for a shorter period, usually 12 months but sometimes 24).
However, even these policies can still have some significant exclusions and restrictions in their small print. Before taking out such a policy, you must double check everything to make sure you can use the insurance in the event it's needed, especially if you have any pre-existing medical conditions.
2. Single Premium Policies
These policies are the ones most often mis-sold, with the premium for the payment protection insurance paid up front. Most lenders will fund this premium by adding the full cost of the policy onto the loan, often the borrower will not be told that this additional amount will also be accruing interest for the full term. Having the PPI added to the loan amount in this way can inflate the cost of the insurance massively, for example,
if the cost of the PPI is £2000, and the interest rate of the loan (which your payment protection insurance is part of) is 8.9%, then the interest payable on just the PPI element over 5 years is £485.18, bringing the actual total cost of the PPI to £2485.18.
Another problem with Single Premium Policies is that PPI is mostly only ever offered for a maximum 5 year term, if the loan which it insures takes longer than this to repay, the borrower is not covered for the remainder. In certain cases, the PPI will expire on a loan but the borrower will continue to be charged the interest on it.
In such situations a claim can be made for the full amount of PPI, or if the PPI element was cancelled before the loan was complete, it is possible to claim a refund from the lender for the unused proportion of the insurance.
3. Monthly Paid Premium Policies
This type of payment protection insurance policy is most often sold alongside credit cards to cover any outstanding balances in the event of the borrower being unable to pay. Usually not a problem to cancel, a telephone call or letter will normally suffice, the premiums are paid on a monthly basis.
However, these types of policies are still sometimes mis-sold, often the borrower isn't aware that they have taken it out (failure to correctly notice or tick an opt out / in box on the credit or store card application form). In these circumstances it is possible to make a claim to have any payments refunded, plus claim the interest on each payment at the Contractual Interest Rate.
If you think you may have been mis-sold a Payment Protection Insurance policy and want to discuss it with an expert from Farleys Solicitors, then call freephone 0800 074 1958 or e-mail us.
