Unlike the types of insurance that cover health, homes, travel or cars, payment protection insurance covers payments due on an existing loan or agreement in the event the borrower is unable to pay. In all its forms, insurance protection is designed to cover the costs of an unexpected event or loss. The same principle applies for payment protection insurance, also known as PPI.
To source rate quotes for all your insurance coverage needs simply enter your ZIP code into the FREE toolbox now!
Maintaining a clean credit record means keeping up-to-date on any payment obligations.
In effect, PPI provides a way to ensure any existing financial obligations will be met should an unexpected layoff or disabling injury occur.
PPI Names and Coverage
Because of all the possible scenarios where Payment Protection Insurance applies, PPI goes by a variety of names, some of which include:
- Accident Protection Insurance
- Loan Protection Insurance
- Sickness & Unemployment Protection Insurance
In many cases, Payment Protection Insurance is sold along with certain items that carry a high price tag, such as mortgages and car loans. Items that provide a continuing line of credit, such as credit cards or store cards may also come with Payment Protection Insurance. This type of insurance will only cover a person’s payments for a designated period of time and only under certain conditions. The conditions most likely covered under PPI include:
- Involuntary unemployment
- Accident leading to injury
- Chronic illness
PPI policy coverage lengths can range anywhere from 12 to 24 months, though different policy plans can run longer or shorter in time periods. So, if an accident, illness or unemployment period lasts longer than the time period stated in the policy, policyholders must cover any remaining payments on their own. Read an opinion on the wisdom of getting PPI in this financial services blog here.
Each type of Payment Protection Insurance carries its own policy terms, though certain conditions apply within most standard plans. Different levels of coverage and different exclusion conditions exist for each type of plan.
In some cases, policy terms may incorporate life insurance protection, meaning payment protection will cover payments if an unexpected death occurs.
In terms of unemployment coverage, most PPI policies will not cover people who are self-employed or retired. As self-employed individuals typically have income earnings that fluctuate, insurers will not cover this category of income earners. Also, PPI will not cover someone who is unemployed at the time the policy is purchased.
If a pre-existing medical condition exists prior to taking out Payment Protection Insurance, most policies will not apply under these conditions. Some policies may also exclude conditions related to mental stress or back injuries, in which case policyholders are left with no payment protection.
For claims that meet the terms as stated under a PPI policy, most plans enforce a 30-day deferment period. This means policyholders have to cover payments out-of-pocket for the first month after a claim is approved. In the majority of cases, once a claim is filed and paid, the PPI coverage becomes null and void, so only one claim per policy is allowed.
Payment terms for Payment Protection Insurance policies can vary depending on the type of insurance involved. In some cases, buyers must pay the entire cost of the insurance upfront while others pay a monthly charge to maintain insurance coverage.
Policies that cover credit card balances and overdraft protection typically include a monthly charge since these accounts exist on an indefinite basis. In the case of a fixed term account, such as a personal loan or home mortgage, policyholders usually pay PPI charges upfront. This means the cost of the payment protection coverage is calculated for the entire term of the loan and then added onto the total amount borrowed.
In the case of fixed terms accounts, interest charges become a factor since the interest portion of each loan payment is based on the size of the payment amount.
For example, if PPI coverage runs $150 for a $1000 fixed loan amount, borrowers end up paying interest on $1150 instead of $1000.
With both fixed and continuous loan or credit accounts, Payment Protection Insurance is usually only available for up to three to five years. This means people who pay for PPI upfront on a long-term loan may be paying on interest charges long after PPI coverage benefits expire.
With the range of policy terms and exclusionary conditions that affect Payment Protection Insurance plans, consumers should research the market to ensure the type of protection purchased will do what it’s expected to do. Purchasing the right PPI plan will ultimately provide peace of mind should the unexpected occur.
Since many PPI plans are included at the point of purchase, many consumers assume they have to settle for the plan being offered at the time. In many cases, sales personnel earn hefty commissions off of PPI plan sales so it’s in their best interest to stress the importance of buying a policy at the point-of-purchase. In actuality, consumers can purchase stand-alone PPI plans that provide payment protection for a range of products and credit-based accounts.
Many stand-alone plans also cover the more common exclusionary conditions, such as stress-related work leaves. Other stand-alone plans allow for more than one claim to be made on the same policy. By conducting a little research, online consumers can find Payment Protection Insurance plans offering terms and conditions that best match a person’s financial planning needs.
Issues Surrounding PPI
The practice of selling Payment Protection Insurance plans at the time a product is sold has left many consumers unable to file a claim and receive the payment protection benefit when needed. These situations arise when policy plans are mis-sold, meaning the purchaser did not qualify for the plan at time-of-purchase or when it came time to file a claim.
As salespersons have a financial incentive to sell as many policies as possible, many may not be aware of the conditions that must be met in order for a purchaser to qualify for PPI benefits.
If a policy is sold to a retired person or someone who is self-employed, these conditions automatically disqualify buyers from filing a claim. Anyone who is injured or chronically ill when purchasing a PPI plan also falls in this category. Read a blog on claims from folks who believe they were mis-sold PPI policies right here.
When considering a Payment Protection Insurance Plan, pay particular attention to the policy terms and exclusionary conditions to ensure the plan will do what it’s supposed to do. If at all possible, research available plan options online before making a final decision.
People who already have Payment Protection Insurance on a purchase or a credit line do have the option to cancel coverage at any time and switch over to more suitable plan coverages. Cancellation processes can vary depending on whether the insurance cost is paid on a monthly basis or has been bundled with the actual loan amount.
For monthly charges, policyholders can stop paying the insurance premium charge in any given month. PPI coverage will end in the month where no premium payment is made. Setting up a monthly PPI premium charge is preferable to the upfront charge as it gives consumers more control over their finances.
In the case when insurance charges are paid upfront (or bundled with the total loan amount), policyholders may have a difficult time recouping the insurance costs. In some cases, lenders may have to completely restructure the loan, which can result in higher interest rates. Insurers may also charge administrative fees to cancel the policy coverage.
In both cases, consumers do have the option of canceling payment protection coverage within the first 14 days after purchase. Ultimately, it’s best to know what a PPI plan offers beforehand and avoid being left in a financial bind when the unexpected happens.
Use your local ZIP code and the FREE quoting tool here to research your own insurance needs now!