One in the eye for PPI: the cover that is out of credit

As payment protection insurance is slammed by the competition watchdog, Kate Hughes asks if anyone should be buying these policies

Payment protection insurance (PPI), condemned by consumer groups as a "rip-off", is set for a shake-up.

Customers are being overcharged by a massive £1.4bn for PPI, according to a damning report from the Competition Commission last week, its investigation prompted by a "supercomplaint" from charity Citizens Advice.

PPI, sold as a safeguard against being unable to make repayments on a loan due to accident, sickness or unemployment, is where banks make a big chunk of their profits. The commission's findings raise questions about pushy sales techniques, suitability and, whether PPI should be allowed in its current guise at all.

It is available for almost any type of borrowing – mortgages, cars, personal loans, credit and store cards – and purchase plans on items like three-piece suites and kitchens.

The cover only lasts a year or two and will usually not kick in until any company health-insurance scheme finishes. You may not get your money for months or even years after your claim. And PPI will only cover the repayments on that particular loan, not other pressing costs like food and utility bills.

Despite all this, more people have PPI than any other sort of protection policy, some of which are more likely to be more appropriate for the customer's needs.

"If consumers knew the full details, very few would opt for PPI," says Matt Morris, a financial adviser at broker LifeSearch. "The real problem is that people have these policies pushed on them when taking out loans, without any real idea of the alternatives out there. PPI policies usually only run for 12 to 24 months and are laced with exclusions. They rarely offer value."

Likewise, Peter Chadborn at independent financial adviser CBK, says the paying of commission by banks and other PPI providers to their sales staff is not in the consumer's best interests. "Sales people will often befuddle customers about what they are or are not covered for and what their options are. They will usually fail to discuss any insurance policies or work-based health plans the customer already has, and fail to raise the importance of any pre-existing medical conditions including back pain and stress – which often delay or void the policy payout if something happens.

"A salesperson often implies that the loan or finance will not be granted if the customer does not buy the policy, which is also wrong."

The Competition Commission says the future of PPI will depend on pro- viders clearly informing customers that they have a choice when buying cover, and that shopping around may save them money. The commission also plans to promote competition between providers to help drive down the cost of PPI.

But banks worried about their profit margins, as well as the insurance providers themselves have hit back. "There have been problems with PPI in the past and the industry has worked very hard to make changes," says Nick Starling at the Association of British Insurers, "But we need time for those changes to take effect. It is essential that the commission's remedies do not damage the PPI market."

But financial experts advise that one of the simplest short-term ways to protect yourself financially is building up a reserve equivalent to three to six months' income. This should be kept in a high-interest but easy access savings account.

For comprehensive cover, income protection is usually considered far more suitable than PPI. If you claim, the policy will, if necessary give you an income until your retirement date.

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