Is payment protection insurance worth paying for?

Anyone who is taking out a loan or credit card - watch out. The likelihood is that you will be signed up for payment protection insurance, whether you want it or not. This is because lenders and credit card companies are desperate to recoup costs of todays highly competitive lending and credit card markets by maximising the number of people taking out this expensive form of insurance. Payment protection insurance sounds a good idea but usually it isnt.

Although payment protection insurance will pay your personal loan or credit card bill if you are made redundant or are too ill to work, these policies normally only provide cover for just 12 months. Furthermore, payment protection insurance cover generally will not start for at least three months, so the maximum you can normally claim for would be nine months.

Even worse is that fact that many payment protection insurance policies usually dont cover the unemployed, the self employed or those with pre-existing medical conditions. This means that people may find they have paid for policies which they cannot make a claim.

In addition, payment protection insurance is invariably overpriced with some lenders adding substantial margins onto the product, to the extent that Which? Magazine estimates the industry is making over a £1bn a year from the sale of this product.

But it is the sales tactics employed when selling payment protection insurance that are most worrying. Some providers simply add this insurance onto a quote, irrespective of whether the customer has asked for it. When a payment protection insurance policy is added to a loan in this way, the cost is sometimes added to the total amount borrowed and interest is then charged on both. This can mean that the cost of the loan can increase by almost a third after it is added to the loan or credit card debt.

If you wish to protect your income, it is generally far better to take out income protection insurance via an independent financial adviser. Income protection will normally pay out between 50-60% of your salary if you are unable to work due to long term ill health. Payments start at the end of a deferred period, which may be as short as four weeks, although this will increase the cost of the premiums.

It is essential to check what your employer would pay you if you were off sick for a long time. Some employers will pay up to six months sick leave, in which case you can secure a lower premium by arranging a six month deferred period.

You also need to decide whether you want cover for your present job (own occupation) or any occupation - the latter means you would have to be willing to do a different job from your normal one, if required to do so by your employer.

It is also very important to complete the medical form absolutely honestly as failure to disclose pre-existing conditions will void the policy in the event of a claim.

Anna Bowes of Chase De Vere Financial Solutions comments: "Anyone with monthly financial commitments should check what they have to fall back on, if they fall ill or become unemployed. If your employer wont pay anything above statutory sick pay and you havent got substantial savings, you will probably need an income protection policy."

10 May 2005 © Moneyextra.com

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