Is it really a case of PPI or bust for borrowers?

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The job news is bleak and many of us are wondering how we would pay for our mortgages, loans and other forms of credit if we were made redundant. Over the years, some 13 million of us have bought payment protection insurance (PPI), which covers our loan repayments if we are unable to work. In the current climate, that sounds good, but the cost to the consumer can be considerable. Many policies will only cover the minimum credit card repayment, and typically for just 12 months.

With PPI representing a huge source of profit for banks and insurers, customers have frequently been subjected to hard-sell techniques, including being denied information about other, potentially cheaper and more appropriate, insurance. After years of complaints from consumer groups, the Competition Commission finally acted last week. It has proposed a ban on the sale of PPI policies at the same time as a loan or credit agreement is struck – only allowing providers to contact customers after 14 days. It also wants PPI sales people to inform customers that the cover is optional and that there are other providers and products available to them.

PPI firms, though, have warned that the proposals could leave consumers unprotected. "This is devastating news," says Nick Starling, director of general insurance and health at the Association of British Insurers, adding that unemployment claims on PPI have increased by almost 70 per cent in the past year. "By effectively denying consumers PPI in the very economic climate that they need it most, the Competition Commission has got this completely wrong."

And consumers could find that their loans become more expensive. "Lenders may have been subsidising their lending rates with the vast profits generated by PPI," says Andrew Hagger of advice website "Banks are not going to take this lying down. We could begin to see interest rates increase significantly."

But PPI is not the only option for those looking to protect themselves. You could, for example, buy accident, sickness and unemployment cover, which is bought independently of any loan. Protecting £100 of income will cost around £5 a month in ASU premiums, which will also usually cover you for just 12 months. You are not currently assessed on how risky your personal situation is, but this could be about to change as some ASU providers are said to be withdrawing their products with a view to repricing and risk evaluation.

But many financial advisers urge consumers to look at another solution. "The most obvious is income protection insurance, which can be tailored to the length of cover and level of benefit required," says Peter Chadborn, a protection specialist for independent financial adviser CBK. "It can also include an extended deferred period to avoid overlapping with other benefits. This in turn reduces the premium."

Income protection is available, again separately from any loan, through a number of high-street and specialist providers. Unlike PPI, it covers a proportion of your income, rather than simply the payments on one loan. And if you are unable to work again, income protection will continue to pay out until retirement at 65. Your premium is based on how likely you are to claim.

Price-comparison websites offer "best buy" tables for these types of protection policy, although financial advisers warn against going for the cheapest option rather than the most appropriate insurance for your circumstances.

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