The other day I received an email from a SavvyWoman user called Lisa, who wanted to know if it was worth buying redundancy insurance cover. PPI (payment protection insurance) has a pretty shocking reputation — but are the policies much better today or do they have the same problems? And if you want to take out a policy that will pay out if you can’t work, what should you look for?
Where to start…
If you Google ‘PPI policies’ you mainly get adverts for claims management companies, which I suppose says something. Payment protection insurance is still being sold today, although you can’t be sold it at the same time that you take out a loan or credit card deal (thanks to new rules by the Competition Commission). Although, of course, you can go online and buy it whenever you want to.
– Don’t be bamboozled by the jargon. Payment protection insurance policies are often called ‘accident, sickness and unemployment’ (ASU) policies or even ‘income protection’ policies. Payment protection insurance is a bit more limited in that it’s only designed to pay the premiums on a loan or payments on a credit card, whereas ASU policies can cover other expenses.
SAVVY TIP: Whenever I’ve written about income protection policies I’ve meant long term policies that are designed to pay out if you have an accident or fall ill. They don’t cover redundancy or unemployment but they do normally pay out until you reach retirement age (or until you’re able to work again). Some providers have started selling ‘short term’ income protection policies, but these aren’t the same as long term income protection policies. Matt Morris of specialist broker Lifesearch believes that true income protection policies provide much better value in the long run.
What PPI covers
PPI or accident, sickness and unemployment policies are supposed to pay out if you can’t work because you’ve lost your job or are ill. They can:
– Cover the premiums of your loan or the minimum payments on a credit card. Some people think that this type of insurance will clear your loans or credit card debts in full, but that’s not how they work. Instead, they’re designed to pay a monthly payment.
– Pay out a percentage of your monthly income. Some policies can pay out up to 75% of your income up to a maximum of £1,500 a month.
– Pay out for a limited time. Normally you’ll be able to claim for between six and 24 months.
– Pay out once you are registered as unemployed. This normally means that you have to be receiving Job Seeker’s Allowance or at least to have registered as unemployed with the DWP and to be receiving National Insurance credits.
SAVVY TIP: If you’re self employed you often can’t claim unless your business has ceased to trade because it can’t pay its debts.
– Have a waiting period. The waiting period is the length of time you have to wait before you can make a claim for unemployment or sickness etc. It’s mainly designed to stop people from taking out redundancy cover when they suspect they’re about to lose their job. The waiting period varies widely between providers from 15 days to seven months.
SAVVY TIP: Some policies that cover unemployment, accident and sickness have different waiting periods for unemployment and illness within the same policy.
– May not cover existing illnesses. Some policies won’t pay out if you can’t work because of an illness you’ve suffered from in the past. Others will let you claim as long as you have been symptom free for 12 or 24 months.
– Charge more according to your age. Most policies charge more the older you get.
SAVVY TIP: Don’t assume that the price you take out the policy at is the price you’ll pay throughout the term. A number of ASU policy providers increased their premiums a while ago when redundancy looked like a much bigger risk following the deterioration in the economy.
– Refuse to insure certain groups of workers. Some companies have refused to insure certain types of public sector workers where there’s been a high perceived risk of redundancy.
PPI and mis-selling
I have to confess that I’ve never been a big fan of PPI, because I think the cover can be expensive for what it is. But the biggest problem wasn’t the cost but the fact it was so brazenly mis-sold to people who had no chance of making a claim.
In theory it should be much harder for PPI to be mis-sold these days, although last week the Financial Services Authority and Office of Fair Trading issued a warning about new style PPI policies.
– The regulators were concerned about possible future mis-selling. They were worried that insurers were inventing new style PPI type policies that had exactly the same problems as the old ones. In particular they were concerned about so called ‘debt waiver’ and ‘short term income protection’ policies.
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