Payment Protection Insurance (PPI) has played an interesting role in the world of finance over the past several years. This insurance product is intended to protect both the borrower and the lender in the event that the borrower becomes unable to make loan payments, but the product is often misunderstood. Furthermore, while the product is intended to provide a valuable safeguard, it was often abused and led to significant regulatory reforms as well as lawsuits with damages reaching well into the billions. Given the ongoing prevalence of this type of product, consumers will be benefited from understanding PPI, what is does and how it can be abused.
The Scope of PPI
PPI is sold under a variety of names including as credit protection plans, credit insurance, loan repayment insurance and credit protection insurance. Whatever name the product is given, it has the same general purpose. This function is to protect both the borrower and the lender in the event that the borrower dies, becomes disabled or loses his or her ability to make scheduled payments for reasons of lost income. It is specific to the debt for which it is purchased and covers only that debt; it is not transferable to other debts and cannot be used for general purposes in the event of a loss of income.In the context of a mortgage, credit insurance is intended to make one’s mortgage payments if one becomes disabled or loses his or her job.
The insurer makes the mortgage payment until the borrower is able to resume making payments. If the disability is permanent, the specifics of how payments will be made are included in the policy. Some policies will continue to make payments for the life of the loan, while others will payoff the entire debt if the disability or lost income is qualified as irreversible. In the event of death, some policies will have provisions similar to those for a permanent disability, while others may have other requirements that must be met.Unlike full-blown credit insurance, as discussed above, PPI tends to be limited in the term over which the insurer makes payments. In most cases, PPI is intended to make payments for a period of twelve months in the instance of a qualifying event.
It is important to understand which events fully qualify, because there are cases in which unemployment insurance may render a claim invalid, despite the fact that the borrower has lost his or her income. In these cases, one must really understand the details of the policy in order to make owning it worthwhile.
There are two approaches that are used for calculating PPI premiums. The first is a lump sum payment that may be added to the total amount of the loan. Premiums may range in cost but can be as high as twenty-five percent or more of the initial principle balance. This premium is added to the loan when funded and can dramatically increase the total amount of the loan.
This type of premium is typically used when one is making a single large purchase. In the case of credit cards, there is not an easy way to calculate the balance upon which the premium will be levied and the amount is likely to be variable from month to month. In this second scenario, a percentage of the outstanding balance is charged to the cardholder as a PPI premium. The rate for PPI on a credit card tends to range between one half and one percent per month.
While this amount may seem minimal in exchange for the protection, that balance is added each month so the payments compound if one does not payoff the entire balance on a monthly basis. In either case, the charge is significant so it is important to understand the specifics of the coverage before signing up for this type of insurance.
The PPI Scandal
PPI insurance is most prevalent in the United Kingdom. Over the past several years, an increasing number of claims have been made against PPI companies alleging that these policies were sold under unfair practices. As recently as April 2011, the UK courts have ruled in favor of consumers and UK regulators have promulgated new rules that control the standards under which this type of insurance may be sold.In the majority of suits, the basis of these cases centered around the claim by the consumer that he or she never knowingly purchased the policy.
Particularly in instances of large purchases, these policies are sold at the time that the purchase is made and the loan is secured. When a consumer is signing form after form, it is very easy for a sales agent to include a single additional document that commits that individual to an expensive product add-on. In more subtle cases, consumers were asked if they wished to have protection for the loan in the case that they became disabled or unemployed, but the specific costs were never discussed. In a third class of cases, consumers were sold policies that were so restrictive that they were essentially worthless. Given the high cost of PPI, the cost to consumers was significant. As such, the resolution of these cases cost insurers millions as did the fines.
Given each of the above considerations, one may wonder if there is a value to PPI. Unlike life insurance, home owner’s insurance and medical insurance, the decision to buy PPI is fairly complex and is highly dependent on one’s personal circumstances. The beginning of this analysis is to determine the cost of the policy and compare that amount to the protection available under it. Given the fact that these policies typically make payments for only a year and have restrictive conditions under which they pay at all, the decision to buy PPI is very personal. In general, when considering a policy that may cost as much as twenty-five percent of the principal balance but may only make payments equal to five percent in the case of a thirty-year loan, the credit protection afforded may not be worth the outright cost.
Payment Protection Insurance (PPI): News
PPI Claims Service – Midlands, UK
Maple Leaf Financial have a specialist team of solicitors dedicated to dealing with the mis-selling of payment protection Insurance (PPI) products by the banks. We are happy to review these PPI products and to claim compensation for our clients where appropriate.
2000 PPI Complaints a DAY!
The Financial Ombudsman has reported that they are still recieving around 2000 PPI complaints per day. There has been a decrease in the number of PPI complaints made in 2013 vs the same period in 2012, but 2000 PPI complaints per day is still a significant number of complaints to be processed.
Mis-sold PPI see’s FOS hiring more staff
A report this afternoon alledges that the Financial Ombudsman Service (FOS) is considering hiring even more staff to deal with PPI complaints from PPI mis selling, this is despite its pledge to double its workforce this year.
The recruitment drive by the FOS for staff to deal with Payment Protection Insurance, should be concluded by October, this news alledges that this new drive will be over and above this quota, to deal with the flood of PPI complaints.
Money Saving Expert with tips on PPI mis selling : Martin Lewis
We came across a wonderful interview from Martin Lewis aka the Money Saving Expert on tips about PPI mis selling. We are bombarded with TV ads for PPI mis selling and telephone calls for PPI claims, but what does it all mean? Martin Lewis, the Money Saving Expert helps to explain the facts.
Tim Capper reports on Financial Mis-Selling for Maple Leaf Financial. Our aim is to ensure you get honest advice and proper guidance to ensure a suitable recommendation can be made to pursue a financial claim