Payment protection insurance, also known as PPI, is a type of short-term income protection and is usually sold with products that you need to make repayments on, like a loan, credit card or mortgage. This type of policy covers you for the cost of the loan payments if you are made redundant or find yourself unable to work due to an illness or accident. The right policy means you will be able to meet your payments if something goes wrong.
What is payment protection insurance?
Payment protection insurance (PPI), is designed to help you keep up with a loan or credit repayment for a short period if you’re unable to work because you:
- are ill
- had an accident
- have been made redundant.
Most people use PPI to cover financial commitments such as their mortgage, credit card payments or loan repayments.
Making sure you’re able to cover these costs should help keep you out of debt if you do find yourself unable to work.
PPI policies usually only cover a specific debt, for example, your current credit card bill. If you claim, the money will usually go straight to pay off that loan – you can’t use it for anything else. But it’s also possible to buy a “stand alone” PPI policy to cover lost income usually for a period of 12-18 months up to a maximum of around 65% of your annual gross (before tax) income.
Policies typically cover:
- illness or disability
- unexpected redundancy (usually as added option)
- circumstances that stop you working (i.e. becoming a carer)
- death (depending on your policy).
For example, if you have PPI for your mortgage and find yourself unable to work due to an accident, you should receive a regular sum of money towards your mortgage repayments.
What isn’t covered?
Usually, PPI won’t cover:
- for a period up to the first 90 days after you stop working (sometimes referred to as
- the initial exclusion period) – you need to be able to keep paying for this period yourself
- certain illnesses – check the list in your policy before you buy
- pre-existing conditions (illnesses you know about already)
- people who are retired or unemployed
- self-employed people - you’ll need to check the policy terms to see if you can be covered.
Do you need it?
You might want to consider PPI if you have a mortgage, a loan or credit card repayments, and you want to make sure you can continue to pay them if you fall ill or are made redundant.
If you think you need PPI, make sure you understand the policy details.
Read through the policy documents and ask the insurance company – or a regulated independent financial adviser or insurance broker – to explain anything that isn’t clear.
Who doesn’t need it?
If you’re self-employed, work on contracts or do any temporary work, some payment protection insurance policies won’t cover you.
You probably don’t need payment protection insurance if:
- you are unemployed (rather than redundant)
- your partner or family would support you
- you have enough in savings to keep up with payments
- you only have spare cash for basic insurance, like car insurance or buildings and contents cover
- you could get by on your sick pay
- you have an employee benefits package which gives you an income for six months or more, so you can keep up your payments
- your employment contract guarantees full pay for a fixed period, say three or sixmonths.
Other types of insurance to consider
PPI helps protect your repayments when you have borrowed money, but there are different forms of insurance to help cover your income if you’re unable to work.
Short-term income protection insurance (STIP), for example, will cover your essential outgoings for up to a year.
Income protection insurance (IP) covers a wider range of illnesses/disabilities and can provide more cover for a longer period of time. These can be purchased individually and sometimes an employer may already include this cover in their employee benefits package as a group scheme.
These are separate products and shouldn’t be confused with PPI.
You can find out more by following the links below:
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