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A Guide to Payment Protection Insurance

Payment protection insurance is a broad classification of a group of insurance products that provide similar benefits.  There are three common types of payment protection.  They are income payment protection insurance, mortgage payment protection insurance, and loan payment protection insurance.  Again, the benefits of these products are virtually the same, as are the covers.  Each offers relatively short-term assistance for workers (typically 12 to 24 months’ depending on the plan) displaced because of involuntary redundancy, accident, or illness. 

Although the basic aspects of the payment protection products are the same, there are some differences in purpose and features of each.  Income protection insurance is intended to be a monthly income supplement to help replace a sizable portion of lost job income or where the policyholder is unable to work due to incapacity.  It does not provide full income protection for the normal amount, but it does cover a good amount, up to a certain percentage of the policyholder’s income and the providers’ set limits.  Many people rely on the income payment support as their only source of temporary unemployment cover.  The State has largely withdrawn from any type of unemployment protection, as any financial assistance they do provide will often be very little, plus you need to meet strict criteria in order to be eligible. This leaves redundancy protection and protection against being out of work due to accident and illness in the hands of the consumer.

The income payment protection insurance that is part of the payment protection insurance portfolio of products is sometimes confused with a completely different type of income protection insurance.  The reason for the confusion stems from the synonymous use of names and terms in discussion of the products.  Income protection is a longer-term, higher premium insurance product that sometimes pays benefits up to retirement for some people and will typically cover incapacity only.  This is different from the short-term nature of the payment protection covers.

Mortgage protection insurance is very similar to income payment cover, but it does have a slightly different purpose.  Mortgage protection is intended to help assist the insured through coverage of the monthly mortgage obligation.  For most people, their mortgage is the most important financial obligation because their homes are secured by it.  Failure to meet mortgage repayment guidelines can result in repossession.  Many properties have been saved by the assistance provided by mortgage insurance.  Mortgage protection insurance is routinely sold in combination by banks and lenders, but this packaging of loans and insurance has come under fire in recent years.

Loan protection insurance is the third of the common payment protection insurance products.  It is very close in nature to mortgage protection, but again, its purpose is somewhat unique.  Loan protection is typically there to help cover full monthly debt obligations.  As revolving debt and credit card balances continue to rise in the UK, consumers need stable income to help repay their obligations.  Loan insurance is intended to cover monthly debt plus often includes a provision for an income supplement to help with some basic monthly expenses.  As with the mortgage protection and unemployment cover plans, loan protection is regularly sold in combination with loans by banks and lenders.

The process of packaging loans with payment protection has long been the practice of many banks and High Street lenders.  In recent years, this process has drawn the ire of consumer advocate groups who argue that some mis-selling practices are prevalent in the industry which put consumers at an unfair advantage.  For instance, some lenders pressure borrowers into believing they have to buy the insurance protection to get the loan they desire. 

Others package premium costs of income insurance into the loan repayment without even letting the borrower know.  This way, an unscrupulous lender can hide the expensive nature of their premiums by spreading them over time.  The only communication of this to consumers typically comes in a note in the fine print of a disclosure document.

These mis-selling tactics were brought to the attention of the Office of Fair Trading (OFT) through a super complaint filed by Citizen’s Advice, a leading consumer advocate group.  Along with the charges related to packaging of products, the group also made mention of another unethical selling practice used by some sellers.  It brought to light that retired people, part time employees, and those with pre-existing medical conditions in some cases were all being sold plans.  All of these groups are in most cases  ineligible to collect benefits based on the exclusions of payment protection.

As a result of the complaint, the OFT and the Financial Services Authority (FSA) conducted investigations of the payment insurance industry.  The FSA concluded its investigation by fining and sanctioning sellers it found using unfair selling practices.  The OFT appointed the Competition Commission to perform further research in the industry and they are waiting on the results.

Perhaps the best result of the industry publicity has been heightened consumer awareness of deceptive payment insurance selling, benefits of payment protection, and recognition of the value of an independent unemployment insurance provider.  Independent payment protection specialists such as the ethical British Insurance, provide a more advantageous payment cover environment for consumers.  Consumers are much more empowered to make choices in payment protection by working with a reputable standalone insurance provider.

Independent providers such as British Insurance provide redundancy insurance and payment protection insurance at typically 40 to 80 per cent less than rates offered by banks and High Street lenders.  They also maintain a better reputation for ethical selling and business practices. 

Consumers need to recognise that payment cover is their best option for redundancy, accident and sickness insurance.  Whether the payment insurance takes the form of income insurance, mortgage insurance, or loan insurance, the important thing is that the insured person receives adequate replacement of a portion of monthly income.

Find out more about payment protection insurance | Explaining payment protection insurance

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