Loan payment protection insurance
Loan Payment Protection Insurance from British Insurance
Just about everyone will need to take out a loan at some point in their lifetime. That big outlay on a car is one of the main reasons why many of us need to borrow money, along with other big costs, such as holidays and expensive electronic goods. But what if suddenly, through no fault of your own, you couldn't keep up with the repayments on that total you borrowed from the bank or on your credit card? This is what loan payment protection insurance covers.
A sector of payment protection insurance, loan payment protection insurance is short-term protection on paying back your loan, secured or unsecured, should your income from work be lost due to illness, injury from an accident, or involuntary redundancy. A key feature of the market is that premiums vary from one provider to another. As with many forms of payment protection insurance, it does not need to be bought at the time of taking out the borrowing and it should not be necessary to take it out with your loan provider in order to secure a loan.
When you make a successful claim and the cover activates, your insurer will provide a monthly tax-free income towards the cost of your repayments. What percentage of the payment it covers is down to you and up to the insurer’s limit. Typically, the maximum amount you can insure protect is 125% of your loan repayment up to £1000 - or 65% of your gross monthly income.
Loan payment protection insurance, a specific form of payment protection insurance, may be suitable for people for a number of reasons. You may feel a broad payment protection policy is not necessary or too costly, or perhaps the loan or credit card bill is what you are most worried about. If you fell ill, were injured, or ended up out of via involuntary redundancy, you perhaps feel you would still be able to somehow meet the cost of your mortgage, but are worried about the card bill that will still be landing on your doormat.
If the bills remain unpaid there is a risk of action that could see property repossessed by bailiffs and a stain slapped on your credit rating. However, this does not mean you should buy your protection from your loan provider or a big high street name – standalone providers, who are often cheaper, will be able to deliver the same cover, and possibly even at a better level than the person offering it to you over the borrowing counter.
Clauses and Conditions
The policy you do opt for will start to pay out after a specified period of time after your claim, typically anything between 30 and 60 days after losing your income through being unable to work or being made redundant. Some providers will backdate the payments to the very day you first lost your income, although not all firms do this. A policy will usually pay out continually for one or two years – again, this varies between providers.
So, a policy can protect against the dreaded knock at the door and the blot on your credit rating if you cannot keep up with loan payments should you lose your income through no fault of your own. The advantages of this are that you can carry on recovering or looking for a job safe in the knowledge your loan and or card payments will not be a problem.
However, the loan payment protection insurance sector is part of a market still under scrutiny. It is a section of the payment protection insurance market, under the remit of an ongoing investigation by the Competition Commission, the findings of which are expected to be released in early 2009. This started as a result of the market being referred to the Commission by the Office of Fair Trading, which found some providers had been selling forms of payment protection insurance to people who were unsuitable for it, such as people on part time employment or those of retirement age.
With this in mind take care – whether you have decided you need it and are shopping around – or whether you are being offered it by your loan provider. The Citizens' Advice Bureau makes useful, simple, recommendations that can guard against getting stung unnecessarily – such as always reading the small print, checking loan payment protection insurance is not automatically included and added on to the cost of a loan, and checking the exclusions.
The Exclusion Zone
One exclusion to bear in mind relates to illness – almost all policies exclude claims resulting from stress or other types of mental illness. Advice offered by the Financial Ombudsmen Service, noted in an April 2001 edition of Ombudsmen News, said people who sell loan payment protection insurance are not always specialists in the field and some will have little or no knowledge of policy terms. This affects the standard of advice given to borrowers who could end up unclear over what they are paying for and with an unsuitable product.
That is why it makes sense to go a specialist in the payment protection field. Standalone providers may save you as much as 80 per cent on your premium when compared to the bigger names who may try to sell you cover as you are taking out a loan. Besides the savings, a standalone provider that deals in only this type of insurance will probably have a broader range of knowledge and be able to offer a better standard of specialist advice.
Although the payment protection insurance industry has taken a beating in the press, and understandably so, this does not mean products like loan payment protection insurance should be discarded. They still serve a purpose and provide a valuable safety net should the worst happen and your income disappears. If loan payments are even late rather than not made your credit rating could well be affected, with adverse effects in future. Just make sure you don't end up paying through the nose – shop around and remember the benefits independent providers can bring. The next time a loan provider offers you their cover as you are about to borrow their money, think twice before putting your signature on the dotted line.
