Payment Protection Insurance – Is It Worthwhile?


 Payment Protection Insurance – Is It Worthwhile?

The only time payment protection insurance (PPI) is worth the money is when you are unable to work because of an accident or illness and can't earn any income or, for example if you are having a baby.

Otherwise it shouldn't be your first choice, as the premiums and contributions will outweigh the benefits in most cases. It's worth considering when buying other types of insurance but should not be seen as a replacement for life cover or important aspects of your savings strategy such as investing.

Flexible savings schemes which allow you to borrow against your pension pot could be better option than PPI.

The complaint is that the FSA has not been able to prove if PPI was working as they had stopped investigating after the 8 September decision by the European Court of Justice (ECJ). The judge ruled that PPI is a form of insurance rather than a loan. This means there are no charges on PPI in the UK and does not have to be regulated by the FSA.

As a result, financial institutions are now offering a range of new products which look very similar to PPI but less expensive. These new products were originally developed in Australia and New Zealand and have been sold in Europe since 1999 under a range of names such as "milestone", "Milestone II" and "facility release".

Financial regulators are, however, now trying to tighten up on these new products, with the FSA and Financial Ombudsman Service (FOS) insisting they are "not PPI", whilst the Bank of England has been urging UK banks not to issue them.

Germany has also banned these products from being issued by its 16 largest banks – although there is no suggestion that Germany's laws were influenced by the ECJ ruling. The German authorities have pointed out that some of these products are very similar to PPI in that they offer fee-free loans which can be used to cover a high purchase price or other emergency costs.

The FSA states: 'Where a PPI policy is not required, for example, where a consumer has access to adequate emergency funds and other means to pay for unexpected expenses, or is protected from such risk by a source of income, such insurance cover can be viewed as providing an unnecessary additional cost.'

The FSA is currently reviewing whether any new product that maintains the essential features of PPI is permitted. It appears that they will not be made available in the UK until this review has been completed.

All types of PPI

1. Single-premium policies require only one payment covering you for the rest of your life.

2. Deferred premium policies are taken out to cover future payments such as mortgage instalments or a monthly car loan. These policies do not have to be repaid until the end of the term – usually one, five or ten years.

3. Reinstatement policies ensure that you keep some level of cover should you cancel the original policy or lose it through job loss at any time during its term, even after just a few months. The premium will always increase but in the event of losing your job, for example, this is a useful policy to have in place as you will be able to keep any level of cover you may already have established for a period before premiums get too high.

4. Split-premium policies are usually taken out by people putting together two or more policies to pay for short-term needs.

Never buy a PPI policy if…

1. The only reason you need one is because of a death or illness, as these are covered under basic life cover for the rest of your life. If you do need to take money out of your pension pot or savings, then make sure it is invested earning an income and that the sums available to you cover all future expenses for at least 40 years – in other words the pensions pots will last 75 years.

2. You are not heading towards retirement yet and have many years ahead to enjoy life without drawing money from your savings.

3. You are trying to keep the cost of PPI cover low by minimising the premium you pay each month by putting it on a credit card or on other plans which draw no interest, or you are paying small monthly instalments which add up to much less than the total sum you will need if you ever need to claim money from your policy.

4. You have not calculated exactly how much it would all cost to cover yourself in each eventuality if anything went wrong, including insurance for accidents and illnesses which could affect your ability to work.

5. You are not confident that you could still afford to live comfortably without drawing money from your pension pot or savings.

Remember: PPI does not cover you when:
• You cannot work because of an accident or illness and are unable to earn any income, for example, in the event of a cancer diagnosis; • You have a child due within the next 12 months (in which case you should take out other forms of life cover, such as critical illness or critical illness rider); • You lose your job and do not have enough savings or another source of income to live on; • Your income drops significantly.

Taking out PPI on a mortgage or loan is not advisable

It is becoming more common for financial institutions to offer PPI policies in their place of a standard repayment mortgage. Usually, this insurance offers protection for people living off one income and gives you the option of increasing your mortgage should you lose your job or have an accident which makes it impossible for you to work.

However, PPI does not just protect against an inability to work: it can also be used if you suffer a drop in your income. If, for example, circumstances change and you find yourself working fewer hours or earning less than before – this could still have the effect of making it difficult for you to afford your monthly payments.

PPI is most likely to cover you if you already have a premium-free repayment mortgage. In addition, you should make sure that your mortgage provider is one of the few that offer a policy which does not allow the lender to put withdrawal charges on your payments (for example, the difference between the current interest rate and that which would be available in the event of your death or illness).

The Bank of England has warned people that these policies are not regulated by them and mean they could be sold without consumer protection or price comparison.


It is very difficult to calculate whether the cost of buying PPI makes sense for a member of the public who is not going to work for many years yet. As most people's lives are changing and becoming more uncertain, it is important to ensure that you can afford to keep afloat regardless of what may happen in these future years. Taking out a policy which covers your mortgage or loan repayments can be sensible – but only if you can still afford to make a meaningful contribution towards your mortgage or loans each month.

The key thing is not to spend money on having this cover without first assessing your own particular situation and calculating whether PPI will work for you.

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