Don’t fall victim to the payment protection insurance racket
THE SUNDAY EXPRESS - 24TH APRIL 2005
Providers of loans continue to offer rip-off cover despite clampdown.
The huge confidence trick that is payment protection insurance has finally been recognised by chief City watchdog the Financial Services Authority, which last week said such policies posed a risk to consumers’ financial health.
Payment protection insurance can add thousands of pounds to the cost of loans, credit cards, store cards and mortgages. In theory, this is designed to make your monthly repayments if you are unable to due to accident, illness, disability or unemployment.
However, these types of policy have long been criticised by campaigners as offering shocking value when bought directly from lenders.
In many cases, payment protection insurance is also marketed in appropriately – for example, when cover for loss of employment is sold to the self-employed who would never be entitled to claim on it anyway.
The FSA says it has concerns about the aggressive sales techniques, lack of suitability and complex terms involved in payment protection insurance.
Behind the scenes, the watchdog is investigating the market to uncover bad sales practices among lenders, insurers and independent financial advisers. “We want to make sure firms are adhering to out rules.”
The FSA can heavily fine – or even strike off – firms breaching its guidelines but it sees its role as a preventive one. “Our main aim is to avoid a major problem, rather than having to mop one up,” Bradley says.
The two main criticisms are that payment protection insurance is expensive when bought through lenders, and if often taken out as a result of aggressive sales techniques.
Consumers groups complain lenders are forcing payment protection insurance on borrower who don’t really understand what they are purchasing.
For example, when taking out a personal loan, it is common for customers to be given the impression their application will e approved only if they agree to buy insurance from the same lender as part of the deal.
I you purchase payment protection insurance from a lender, it will typically add the full insurance premium to your loan at the outset, then charge interest on it until the loan is repaid. For example, Northern Rock bank’s £7,000, five-year loan with an interest rate of 5.7 per cent charges monthly repayments of £168.58, with payment protection insurance accounting for £34.72. over five years the payment protection insurance alone amounts to £2,083.
If you buy your cover separately from an independent provider, such as specialist insurers Burgesses, you will simply pay a monthly premium by direct debit but, importantly not a penny in interest.
“If more customers used standalone cover for their loan payment protection insurance, the traditional lenders might be forced to rethink their pricing structure and sales methods,” says Andrew Hagger of market analyst Moneyfacts.
Despite similar warnings from experts, business has been booming. Latest figures form the Association of British Insurers indicate sales are running at more than 1,000 policies an hour, with lenders raking in an astonishing £8 billion a year in commission. A report from investment bank Credit Suisse First Boston has revealed high street banks are taking about £2 billion in premiums a year and making as much as £1.5 billion profit.
Consumer groups are still adamant that a huge proportion of those taking out credit agreements are being ripped off when sold worthless and overpriced payment protection insurance policies.
Which? magazine recently described payment protection insurance as “offering little benefit”.
A Which? spokesman adds: “Consumers should avoid taking out payment protection insurance on loans and credit cards. Any benefit is often little more than the premium paid for the cover.”
How payment protection insurance works
For borrowers who do not have any other type of protection – such as insurance for income protection, critical illness or life – payment protection insurance may be a worthwhile purchase.
It can offer peace of mind to have some form of protection but remember the price and scope of payment protection insurance policies varies greatly.
Of the hundreds available you can select those which cover accident, sickness and unemployment; accident and sickness only – which can be useful for the self-employed or those who do not worry about unemployment – or unemployment only, which can complement products such as income protection.
Pre-existing illnesses are generally excluded from policies, which may render the insurance useless for many. Most policies will offer cover for either one year or two when you are unable to meet repayments – typically after a deferred period of one or two months although some policies will pay out from day one.
These features are reflected in the premium, so policies which offer less cover will be cheaper.
Store-card and credit-card insurance ban be misleading because it often does not pay off the balance but merely makes the minimum payment each month, leaving interest to continue accumulating.
Given present market conditions, it is still generally cheaper to take out standalone cover than accepting the provider’s own deal.
Hagger from Moneyfacts, says: “I urge consumers to check out the simple online quotations from these independent providers, then compare them with the cost of similar cover form their bank or building society.
“They will be amazed to see the savings they could make.”
Broker Burgesses has launched a monthly loan payment protection insurance policy with a comparable level of cover but at a much lower cost, it claims. Burgesses’ offers cover from day one, instead of the usual 60-day excess, and it can be cancelled at any time by the borrower to provide better value and flexibility.
Burgesses claims its standalone policy costs up to 80 per cent less than similar ones form lenders.
Meanwhile, rival broker Payprotect offers standalone mortgage payment protection insurance cover and a policy that can be sued to meet a wide range of financial obligations.
Premiums start from £1.46 for each £100 insured and can cover a loan, credit card debt or even rent if you do not own your own home.
How to play safe
• Always check whether the repayment quote includes cover.
• Find out how much the policy costs, whether you are charge interest on it, and the amount you are covered for.
• Do not be misled into thinking you will be turned down if you refuse cover.
• If buying insurance, make sure it is suitable for your circumstances.
• Find out in which situations the policy will pay out, and how long for.
• Check the cover you have already, for example, through your employer or health insurance.
Case study
Stephen Dimsey had an unsettling experience with payment protection insurance when dealing with a mortgage company.
Stephen, 26, took out a 20 year loan to pay for a business idea.
When it came to signing the agreement he realised that on top of the £200-a-month loan repayments, the lender had added on a payment protection insurance policy costing £70 a month.
“I thought this was appalling – it was almost half the repayment itself,” says Stephen, of Gillingham, Kent. “I felt I was being ripped off so I cancelled the payment protection insurance and went in search of an independent insurer.”
To rub salt in the wound, the mortgage lender’s policy would have paid out for only three years even though the policy last 25; the £70 charge was to be paid for the entire term of the loan.
Stephen, married with an 11-month old son, took out a policy with broker Burgesses, which offers standalone insurance.
“I found the policy on the internet,” he says. “It costs £15 a month – far more reasonable.”
