They get you to buy cover, then leave you naked

It's expensive and claims often get rejected. But still we take out insurance for our loans

Is payment protection insurance (PPI), one of the most reviled financial products on the high street, ever worth the money?

The cover is sold with personal loans, credit cards and mortgages. It protects borrowers who fear losing their income through accident, sickness or unemployment and being unable to make their repayments. Heavily criticised, it has now come under fresh fire for its cost and its exclusions.

Borrowers are at risk of wasting as much as £350m a year on PPI policies that don't then pay out, according to a report from financial researcher Defaqto.

Around one in six consumer claims are rejected, while just a third of online loan providers and 60 per cent of credit card firms let customers see the full terms and conditions of the insurance policy before they apply for credit, it says.

Defaqto's warning is the latest in a long line of salvoes. PPI is currently the subject of an investigation by the Office of Fair Trading - following a super-complaint lodged in September last year by Citizens Advice - and has also been scrutinised by the Competition Commission as part of a separate inquiry into store cards. It is also being monitored by the City regulator, the Financial Services Authority.

Yet still some 20 million policies have been sold, says the British Insurance Brokers' Association (Biba), generating £5bn in revenue a year for the banks, building societies and credit card firms that sell PPI.

Defaqto's research backs last year's report, entitled Protection Racket, from Citizens Advice. This argued that PPI was more about producing a profit for the financial industry than protecting customers. It said policies were often mis-sold to people who couldn't possibly claim on them, and riddled with exclusions.

The Defaqto report highlights how only minimal, if any, questions are asked about the health and employment status of consumers when lenders offer to sell them a PPI policy.

This is a big issue, as some of the most common ailments that stop people working - a bad back, stress and mental health problems - are often excluded. Many policies also impose arbitrary age limits and rule out pre-existing medical conditions. Worryingly, buyers often aren't aware of these exclusions - either because the policy hasn't been properly explained or they've missed the details in the small print.

Defaqto is now calling on the industry to publish statistics for claims acceptance and rejection rates, and to give the most common reasons for refusals.

In another part of the insurance industry - that selling critical illness (CI) cover - Standard Life and Scottish Widows have just started to publish claims details to help consumers understand why these may not always be met.

Protection broker LifeSearch has long supported this reform and backs such a move with PPI claims. "It's not to publish a league table [for consumers] - it's to improve understanding," says spokesman Kevin Carr.

Mike Naylor at the consumer body Which? says publication of claims has been a "good thing" in the case of CI and that Which? broadly supports a similar move for PPI. "But these statistics would need to be accurate and reliable - and it is important that claims are classified in the same way to ensure a level playing field."

Statistics would need to be monitored by an independent body, he adds.

Philippa Gee from independent financial adviser (IFA) Torquil Clark thinks the idea is unlikely to get off the ground. "It's sensitive company information, though it would be very good for consumers."

Anyone about to take out a loan, credit card or mortgage will usually be offered PPI at some stage of the process. But don't buy the cover unless you've considered all the alternatives - some of which may already be in place for you. Short periods of illness, say, may be covered by company sickness schemes, and you may have other insurance products such as critical illness cover or income protection.

"PPI is not the all-encompassing policy that people think it is," stresses Ms Gee. "It's more for plugging the gaps as part of a wider package of [general] protection for yourself."

However, if you can't rely on anything other than long-term state benefits should you be off work for the long term, consider a cheaper standalone PPI policy instead of simply accepting one from your bank or lender (see the table below).

You can buy these from providers such as British Insurance or Paymentcare. You simply get a loan without PPI from a high-street lender and then buy the cheap bolt-on cover as a separate product.

Simon Burgess, managing director of British-insurance.com, says its stand- alone PPI policy is "superior" as it pays out from day one - as opposed to the usual 60-day excess period enforced by many providers - and can be cancelled at any time, unlike PPI from high-street lenders.

It generally has the same exclusions but costs less as "we operate online and take only 20 per cent in commission", says Mr Burgess.

If you do decide to take out PPI with a major lender, shop around here too because the deals can vary widely. Ask sales staff to break down the costs.

Despite the criticisms, many argue that there is still a case for PPI.

Ms Gee says there's nothing wrong with the concept but urges consumers to check all the details and not buy the cover without considering alternatives.

Which? says that while PPI for your mortgage can be a cost-effective way of protecting your "number one priority" - ie, your house - it's usually not worth taking out PPI for loans or credit cards. This is because it's expensive and the number of successful claims is low.

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