Loan payment protection insurance
Loan Protection from British Insurance
Loan protection insurance offers short-term financial support for people displaced from work due to involuntary redundancy, illness, or accident. It is an extremely important protection in Britain today given rising reliance on debt and credit cards. Many people rely on the financial assistance to help meet their monthly debt obligations during a period of lost income. Benefits of a loan protection plan are typically paid out over 12 to 24 months, depending on the plan purchased.
Loan protection insurance is commonly sold in combination with loan products by many banks and lenders. This process has recently come under fire from consumer watch groups because of mis-selling tactics used by some banks and High Street lenders. Loan protection does not always cover the entire lost job income, but it does replace a significant portion and it is extremely helpful for many.
Loan payment protection insurance is actually one of three products that make up a portfolio of insurance protections known as payment protection insurance (PPI). The benefits and covers of each of the three types are very similar. They are only different in their purposes, and some of the features offered by each. The other two types of payment cover are mortgage payment protection insurance (MPPI) and income payment protection insurance.
Mortgage payment insurance is similar to loan protection insurance, but its primary intent is help those who have become unable work due to illness, accident or unexpected unemployment meet their most important monthly obligation. For most people, their home is their most vital asset. Mortgage protection helps homeowners keep up with their mortgage payments when income is lost. Again, it does not fully replace the lost income, but it does cover a large portion of it. Mortgage protection is also commonly sold as a package with mortgage products at the time the borrowing is obtained.
The third type of payment cover is income payment protection insurance. This cover is fairly simple to understand. Its purpose is to replace the majority of the insured’s lost income. As with the other protections, it is paid in monthly instalments over the period of repayment, which are tax-free. Again, the insurance does not replace the entire lost income, but it does provide significant assistance that helps sustain people through stressful periods of unemployment or incapacity.
There is some confusion associated with income payment protection. This confusion is related to another type of insurance that is extremely different in its benefits, but very similar in name. Income protection is a longer-term insurance product, with higher premium costs, that sometimes pays benefits up to retirement age. The misunderstandings result from the fact that each product is referred to with many of the same names and terms.
Semantics are not the only reason there is consumer confusion in the payment insurance industry. Banks and High Street lenders have contributed greatly to the market confusion and dislike for the industry. As mentioned, lenders often package mortgage protection and loan protection insurances with loan products. This process alone is not unethical, but the mis-selling practices often used have drawn the ire of Citizen’s Advice, and other leading consumer advocate groups.
Recently, the Citizen’s Advice filed a super complaint with the Office of Fair Trading (OFT) on behalf of British consumers. The group wanted to address several of the more common mis-selling practices used by the institutional sellers of payment cover. Some lenders engage in high pressure selling to manipulate borrowers into believing they must buy insurance in order to get their desired loan. Others go even further by deceiving borrowers. Lenders sometimes build premium costs into the loan repayment. As loan payments are spread over time, they are able to successfully hide the true expense of the payment cover. They only make mention of the premiums in the fine print of disclosures.
Some insurance sellers have even gone as far as to sell the expensive products to part time employees, retired people, and people with pre-existing medical conditions, all of whom are ineligible to receive benefit payouts. The plans require the insured to be employed full time at the time of claim.
As a result of the super complaint charges, the OFT and the Financial Services Authority (FSA) both got involved. Each conducted investigations to research the unfair practices and mis-selling techniques within the industry. The FSA imposed severe fines and sanctions to penalise those it felt used unfair practices. This has helped reduce examples of mis-selling by large banks and lenders, although some online lenders have taken up some of the same tactics. The OFT appointed the Competition Commission to further investigate sellers and it is waiting to hear from the Commission before taking action.
The greatest benefit of consumer awareness is that Brits are starting to recognise the actual benefits of payment cover, but more importantly, that they can get better rates and terms from standalone insurance providers. Consumers have long believed they could only purchase protection at the time of the loan. Now many realise they can buy payment protection separately from the loan product.
Specialist providers typically provide insurance premiums that are 40 to 80 per cent less than rates offered by banks and High Street lenders. This significantly improves the value proposition of insurance for the insured. The low monthly premiums make the benefits of coverage much more advantageous. For many Brits, payment protection payouts are the only short-term assistance available during brief periods of unemployment or inability to work.
Loan protection insurance, mortgage payment cover, and income payment protection can be great products when purchased on the open market from a reputable standalone insurance provider. These specialists maintain relationships with leading insurance providers who usually offer their best products and rates through the providers. These independent providers are also typically members of industry associations that enforce strong codes of business practice and ethical selling processes. This helps them to maintain credibility with consumers who are more and more realising independent provider opportunities. About 60 per cent of new homeowners are obtaining some type of payment protection. This is a huge jump from the one third of current homeowners who have protection. It is indicative of more educated consumers and a more competitive marketplace.
