Summary
Around half the people who take out a loan are also persuaded into taking out the lenders payment protection insurance. This article discusses the reasons why this is not necessarily an insurance worth bothering with.

Payment Protection Insurance - is it worthwhile?

Author: Anna Richardson

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The Financial Services Authority (FSA) has been looking into the issue of Payment Protection Insurance (PPI) and the way that it is sold to people taking out loans ( mortgage quotes ) in the UK. The list includes many of the UKs biggest banks and building societies, and it is single-handedly earning lenders over £1 billion a year.

The point of PPI is that if a loan borrower becomes unemployed or unable to work though accident or illness, the loan provider will cover their payments until they ( life insurance policies ) return to work. The borrower pays a monthly premium for this insurance, something that around 50% agree to when taking out the loan.

However, some interesting information has come to light, as the Department of Trade and Industry has found that only 4% ever make a claim, and only 75% of those claims meet the terms of the insurance. The lenders themselves are in many ways responsible for this, as the FSA found that around 50% of the lenders surveyed failed to explain the ( term assurance ) details and exclusions to borrowers before persuading them to sign up. The investigation also found that although lenders were not telling the customers that the insurance was compulsory, they were often adding the PPI to the quotation without clearly displaying that the insurance was optional. (secured loan)

The FSA also found that some lenders were not informing borrowers that the cost of the insurance to cover the full loan term was being added as a lump sum at the ( car insurance quotes ) beginning instead of as a monthly payment spread out over the loan term. The result was that borrowers would not be able to cancel the insurance without paying the loan off in full and taking out a new loan. (cheap car insurance)

The investigations also uncovered more bad practice: price. Simon Burgess, Managing Director of British Insurance Ltd, has pointed out that one of the major high street banks levies a charge of £30 per £100 of loan insured onto borrowers. Simon added that if borrowers looked onto the Internet, they would find rates of £4 - £6 per £100 of loan insured. Price comparison service uSwitch has supported his findings, which effectively means that banks are charging nearly 500% more than their Internet rivals.

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