How Do PPIs Work

If you’re considering a PPI but you want to know more about how do PPIs work, in this article, we’ll discuss giving you a lowdown on everything about PPI. Also called credit protection insurance, credit insurance or loan payment insurance, payment protection insurance or PPI is a kind of short-term income protection that enables you to make your mortgage, loan or credit card repayments.

PPIs have been in existence in the UK as far back as the 1970s and over 64 million PPIs were sold between the period 1990 and 2010.

How Do PPIs Work?

PPI was usually sold by banks and credit providers as an add on to products such as a mortgage, loan or credit card, where you had to make repayments. PPIs essentially cover the repayments in situations where you are unable to work because of an accident, disability, illness, death, redundancy or any other situation that prevents you from earning an income to repay your debt.

PPIs are short-term policies that are designed to cover a single, specific debt and the insurer will pay you for a specific period of time. For instance, if you claim to pay off your credit card bill, then the money will go towards paying off the credit card outstanding only and you cannot use it for anything else or if you have a PPI policy for your mortgage and are unable to work, then you will receive regular payouts to make your mortgage repayments.

However, you also have the option of buying a standalone PPI policy that covers a portion of your lost income of a maximum of 65% of your gross annual income for a period of 12 to 18 months.

Do You Need PPI?

If you have a loan, mortgage or credit card repayments and you want to ensure that you’re able to repay these even if you’re unable to work because of redundancy, illness or have an accident, then you may want to consider a PPI.

However, it is important to understand the details of the policy and read the documents carefully before committing to the policy.

Who Doesn’t Need a PPI?

Some of the PPI policies may not cover you if you are self-employed, a contractual worker or a freelancer. And, you may not require a PPI policy if you:

• Are unemployed (not redundant)
• If you have a secure job and there is no risk of redundancy
• Have your partner or family who can support you
• Have regular, guaranteed income
• Have sufficient savings to make your repayments
• Can manage on your sick pay from your employer
• Have employee benefits that will give you an income for 6 months or more to meet your payments
• Have spare money only for basic insurance like building and contents cover, car insurance, etc.
• If you have any other insurance like a critical illness, life or income protection insurance

What Is Not Covered by PPI?

• The first 90 days, also called the initial exclusion period or deferred period after you stop working
• Pre-existing conditions (illnesses that you already know about)
• Certain illnesses (it’s a good idea to check the list before you purchase the policy)
• Retired or unemployed people

When Can’t You Make a PPI Claim?

You may not be eligible to make a PPI policy claim if you’re:

• Below 18 years and more than 65 years of age
• Aware that you can become unemployed
• Employed for less than 16 hours per week
• A contract or temporary worker and lose your job
• Self-employed and have to shut your business
• Aware that you have an existing medical condition
• Not able to work because of some conditions like backache, stress, etc.

Factors to Consider before Taking out a PPI

Before you take out a payment protection insurance, you must ask a few questions such as:

• Do you really need a PPI cover?
• If I’m unable to work, will the policy save me from a major financial problem?
• Do I already belong to a sick pay scheme?
• What is the full cost of the cover?
• Is getting an alternative cover like income protection, serious illness cover, life insurance or personal accident insurance better?

And, before you take a PPI, you must ensure the following:

• Cost of the Insurance: While the per month payment of the policy may seem to be inexpensive, the total cost over the entire term of the loan can be quite expensive.
• Policy Conditions: Check the policy terms and conditions and see that it covers and what is excluded. For instance, if you suffer from some illness that the policy does not cover, then you will not receive a payout when you make a claim. Some policies may include redundancy cover, while others do not.
• Upfront Payment: Sometimes, the insurers include the entire cost of the insurance into the original loan, which costs much more because you not only pay the interest on the loan but also the interest on the premium.
• Benefits: Check the benefits that you will receive. Many of the policies cover only a certain time period. For instance, for credit cards, the PPI makes a minimum payout for a limited time period.

Can PPI Claim Be Made More Than Once?

Depending on the type of policy, it may be able to make further claims on the policy if you make a successful claim. For instance, if the policy is a critical illness cover, and makes a payout, then you will stop paying the premiums and the policy will end.

However, if you can make more claims in the future, then you will continue to pay the premiums and the policy will be valid. But, before taking out the policy, you must check if you can claim multiple times and the terms and conditions for the same. Also, if you make a claim, how would this affect your policy.

Can You Cancel a PPI?

Yes, it is possible to cancel a PPI policy at any time. For example, if you cancel your credit card, pay off your mortgage or loan or decide that you don’t require a PPI cover any longer, you can ask your insurer to cancel the policy and if you have paid the insurance amount upfront, then you could be eligible for a refund for the remaining term.

Payment protection insurance (PPI) comes in very handy if you don’t have a salary coming in to pay your debts because of some unforeseen circumstance; however, before taking out a PPI, it is important to consider if you really require it and are eligible for it.