The need for credit to make larger purchases, such as a home or car, has been a fact of life for decades, but the recent economic trouble and unsteady job market have made it more risky to rely on credit. Payment protection insurance (PPI) provides a way to avoid damage to credit caused by loss of income and resulting inability to service debt. Most finance companies make some form of PPI available. The decision of whether to purchase it requires several considerations and ultimately rests with the consumer.
What Does PPI Cover?
All types of payment protection insurance are specific to a particular loan or credit card debt. It will make payments in case the individual is unable to do so. There are several caveats to keep in mind with PPI. It only pays out for a set amount of time and under specific conditions, which means the policy needs to be read and fully understood before purchase. For credit card debt, PPI will typically only pay the minimum amount due on the balance. Benefits are only paid to the lending institution.
The specific amount of time varies between policies with a maximum of 12 months. All PPI policies come with a list of exclusions, and these can make the choice of whether to purchase much easier. For instance, some policies will not pay for self-employed individuals who lose regular income.
Non-payment due to an illness is generally covered, including death, but the policy may exclude specific illnesses or pre-existing illnesses. In addition, the policy may not begin to pay out until a set amount of time has passed. This is usually no more than a few weeks. Finally, PPI may exclude individuals under the age of 18 or over a specific age.
Is PPI a Good Choice?
In many situations, PPI is simply an unnecessary financial burden. In other cases, it can be a credit saver and wise purchase. The first consideration is one of risk. How likely is it that your primary income will be disrupted in the future. This requires some honesty, because many with supposedly secure jobs lost them during the last recession. Some career sectors, especially in finance and retail are more turbulent. General health is also a consideration.
PPI may be ruled out as redundant by other forms of insurance. A hefty life insurance policy capable of covering all current debt can negate the need for PPI, as could existing PPI policies on credit accounts or PPI riders on health insurance. It is important to check with your agent about existing policies before making what can be an expensive purchase.
How Much Does PPI Cost?
The cost of PPI is almost always tied solely to the amount of debt it protects. PPI for a mortgage or other lump-sum loan is often borrowed along with the cost of the property and added to the principal. The cost of single-premium PPI in this instance will usually be around 10% of the original loan plus interest. For a 30-year mortgage, total cost can end up much higher than the initial premium. Credit account protection often carries a minimum fee payable each month in addition to a percentage of the outstanding balance.
People with secure incomes or sufficient coverage from other policies can safely forgo PPI, but others will enjoy the added security. Getting sick or losing a job can happen to anyone. PPI ensures a measure of stability in otherwise trying circumstances.