Loan Payment Protection Insurance

Loan Payment Protection Insurance -
Reasons To Be Careful

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Loan Payment Protection Insurance - What Are The Problems?

When you are taking out a loan, you will usually be offered loan payment protection insurance by the company lending you the money. Taking out a policy through a lender will almost certainly cost you many times more than it ought to.

You could easily be increasing the cost of your loan repayments by 25 - 40% by adding in loan payment protection insurance, which is simply ridiculous. To add insult to injury, you will often be sold a 'single premium' policy, which means that the loan payment protection insurance is paid in a lump sum, the cost of which is added to the amount of your loan. This means you pay interest on the cost of the policy as well as your loan!

Many policies have an excessive amount of exclusions, so lots of circumstances are not actually covered. You may find that you have paid handsomely for cover and then can not get anything back if you need to make a claim.

You may even be sold a policy through your lender without realising it. If the word 'protected' is casually thrown into the conversation when your quote for a loan is discussed, then the costs you are quoted may already include loan payment protection insurance premiums too.

It is estimated that the industry makes a profit of £5billion every year from payment protection insurance. The proportion paid out in claims compared to the money taken in premiums is extremely small in comparison to other types of insurances.

Loan Payment Protection Insurance -
Mis-selling And How To Cancel

If a representative from a loan company tells you that it is compulsory to take loan payment protection insurance when you take out a loan, stop them right there and go somewhere else.

Loan payment protection insurance is almost always optional. They are not actually breaking any law by telling you it is compulsory, but the UK Banking Code says that lenders should not make customers take their policies. Even if they have a legitimate concern that the repayments are properly covered, you should be free to go somewhere else and arrange cover at a more reasonable rate.

If you have been mis-sold loan payment protection insurance, you should be able to claim it back. Check the following indicators to see if you have been mis-sold loan payment protection insurance:

Did they make it clear to you that the insurance was optional?
Did they explain clearly any major exclusions in the policy, such as not covering existing medical conditions?
If the insurance premium was taken as a single premium, did they make it clear that the cost of the insurance was being added onto the loan and that you would be charge interest on it?
If your loan is for longer than your loan payment protection insurance, did they explain that your insurance would finish before your loan repayments, and that you would still be paying interest on the insurance premium after the insurance had ended?

If you can answer 'no' to any of the above, then you may have a claim for being mis-sold loan payment protection insurance.

Many companies have been fined for past mis-selling, so more and more are owning up to it more readily. If you think you have been mis-sold loan payment protection insurance in the past, you should write to the company to make your case. This will almost certainly be rejected by them, but that is to be expected. Write back and say you want them to reconsider and that you intend to write to the Financial Ombudsman if they do not accept this.

If you still do not get a reasonable offer of compensation, then you should indeed contact the Financial Ombudsman, the organisation responsible for settling disputes between financial companies and their customers. You can do this via the website or by telephone on 0845 080 1800.

If the lender does make an offer in response to your letter(s), but you do not feel that it is adequate, you should write back and say that you do not accept the offer, and give an alternative amount that you think would be appropriate. In any such letter you should always state that you would accept the stated amount "without prejudice", which covers you in case of future legal wrangling.

Even if you don't think you were mis-sold loan payment protection insurance, you may still wish to cancel it and get it much cheaper from another insurance broker. You should be able to cancel your insurance at any time without incurring further costs. If you pay the premiums by direct debit, remember to cancel those too.

Cancelling is more straightforward if you are paying separate monthly premiums, but even if you were sold a single premium policy (where you paid up front) you can still cancel and claim a refund. The lender is entitled to charge some reasonable costs, so you may not get a strictly proportionate refund. If you think the amount offered as a refund is unfair, ask to see how it was calculated.

Loan Payment Protection Insurance - What If I Really Do Need It?

Loan Payment Protection Insurance is a perfectly sensible thing to arrange, just not through your loan company. It is generally much cheaper to use a separate insurance company to provide just your PPI policy.

The cost of the policy will vary, and will depend on what cover you require. You really ought to be clear about what you want before you even approach companies. Are you looking to cover unemployment, accidents, terminal illness, death? The more cover you require, the more it will cost you. As with all insurance, you can affect the amount you pay in premiums by varying the excess. In this case the excess will be the period before which you start receiving any payouts. The longer the excess period, the lower your premiums should be.

Whatever you go for, look at the policy carefully before committing yourself.

As an alternative to loan payment protection insurance, you may wish to consider Income Protection Insurance instead.

STOP PRESS: In the UK the Competition Commission have announced that from 2010 lenders will no longer be permitted to sell Payment Protection Insurance within one week of a loan or credit card. In addition to this, the practice of adding the Loan Payment Protection Insurance premium to the loan will become ilegal. Whoopee!

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Loan Payment Protection Insurance -Reasons To Be Careful