Our big-debt protection ... or is it just a racket?

All that shopping to do, all that "low-cost" credit on offer. Consumers are spending and borrowing again, and the windfalls from building societies and insurers this year are likely to fuel the boom. Whether it will end in tears again remains to be seen. But retailers and lenders are pushing payment protection insurance (PPI) as a safety net, not least for themselves.

Credit cards and store cards, personal loans, bank overdrafts, car loans, even domestic bills increasingly come with this option.

PPI is designed to meet payments if people fall sick, have an accident or lose their jobs. For spenders, it can allay fears about taking on additional financial commitments. But the insurance comes at a price and can be worth a lot less than it seems.

However hard the insurance is pushed, it is normally an option rather than a requirement of a particular credit deal. And instead of being charged unless you specifically "tick the box" to say you do not want the cover, the onus is now on the credit provider to get a positive commitment from you before it can charge for the insurance.

But accusations of inertia selling and the suggestion that credit providers themselves are getting both protection and profits from selling PPI have given the insurance a bad name.

The insurance ombudsman has been particularly critical of PPI. Peter Hart, the deputy ombudsman, says policies are sometimes sold to people, such as the self-employed, who may be unable to claim. There is no real competition, insurances are linked to particular offers of credit, and this can mean poor-value policies. The situation is not helped, the Ombudsman adds, by non-experts selling PPI. There are examples of the cover not lasting as long as the loan it is designed to protect and the insurance can be a source of serious profits for the seller.

Indeed it is the element of the protection that is arguably the most appealing, unemployment insurance, where policies can be hardest to claim on. If you are self-employed, for example, you might need to go bankrupt before payments are triggered, while if you are employed you would need to be made redundant and have to sign on as well, and you are almost certain not to be covered if you leave your job of your own accord. Lenders, however, emphasise that policies are normally optional and that the insurance does give customers confidence to spend. David Lennan, head of retail insurance at NatWest Insurance Services, says: "People are concerned about having their lifestyles taken away."

Protecting a loan might cost as much as 80p per pounds 100 of outstanding debt. Payment protection on a Barclays Bank overdraft of pounds 500 costs pounds 4 a month. An unsecured personal loan of pounds 10,000 with NatWest, borrowed over five years, costs an extra pounds 51.29 a month with the bank's Personal Loan Protector.

Some lenders are also improving cover. NatWest, for example, includes self-employed and contract workers. Unusually, it also offers cover irrespective of pre-existing medical conditions; NatWest believes the risk it carries is outweighed by benefits to customers.

PPI is pushed most heavily when you take out a loan or card. But some lenders now give up to a month after agreeing a loan to buy insurance. Others, such as credit-card companies, can start payment protection at any time.

Cover from Barclaycard can be arranged over the phone, at a cost of 75p per pounds 100 of outstanding balance, although the policy does say it will not pay out if you knew you were about to lose your job. You are also not covered for any period you are paid off for from your job, or for 90 days if this period is less.

Consumers considering PPI should look at it in the context of other cover they have that may protect their income and therefore their ability to repay debts - for instance, permanent health insurance (PHI), which is covered on page 14.

Many insurers believe demand is emerging for stand-alone policies that cover financial commitments, rather than income. Marks & Spencer, for example, is looking at offering combined cover for its loans and cards; General Accident allows holders of its Protect Direct mortgage insurance to add a 20 per cent margin to cover household bills; and there has been talk of supermarkets offering policies to cover the cost of weekly shopping.

Additional reporting by Steve Lodge.