Around 50% of borrowers get Payment Protection Insurance (PPI) for their loan. It would appear that many are being ripped off. This article investigates the pitfalls and the solutions.

The Financial Services Authority (FSA) has been investigating the way Payment Protection Insurance is being sold by loan providers which include some of the UK's biggest banks and building societies. And it's big business. Sales of PPI as it's called, earn lenders more than £1billion a year.

What Is PPI

• PPI is designed to protect borrowers by paying monthly loan repayment in the event that the borrower becomes unemployed or unable to work though accident or illness
  
  
• Many lenders sell the insurance alongside the loan with around 50% of customers agreeing to the insurance
  
  
• However, according to the Department of Trade & Industry, only 4% claim and of these claims 25% are rejected
  
  
• This may be partially explained by the FSA's investigation which found that around half of the lenders surveyed failed to explain the details and exclusions to customers or make sure the insurance was suitable for the clients.

While the investigation reportedly does not find that lenders are compulsorily selling the insurance, it was often automatically added to loan quotations without it being disclosed the insurance was, in fact, optional.

Even worse, some lenders are failing to point out to borrowers the cost of the insurance for the full period of the loan, was being added as a lump sum rather than being paid as a monthly premium. This means the borrower cannot cancel the insurance without redeeming the entire loan and renegotiating a new loan.

And hey, some of these lenders know how to charge for PPI.

How Expensive Is PPI

According to Simon Burgess, Managing Director of British Insurance Ltd, one of the big high street banks typically charge £30 per £100 of loan insured. This, he says, compares with between £4 and £6 if bought separately on the internet. This view is supported by price comparison service uSwitch which says taking out PPI with banks can increase the amount you pay for cover by nearly 500%!

Take an example -

• Last year a high street bank was charging £5,150 for PPI to cover a loan of $16,000
  
  
• The cost of PPI was then added to the loan making £21,150 as the total capital repayable and interest charged on the lot
  
  
• This meant that of the £300 monthly repayment, about £70 represented the cost of the insurance
  
  
• Equivalent insurance can be bought on the Internet for around £20 per month and can be cancelled at any time without penalty

So what are the lessons?

• If your lender offers you PPI cover ask for the monthly premium with and without PPI. That way you can see the true cost of PPI
  
  
• Find out whether PPI is added to the loan as an initial lump sum. If it is back off!
  
  
• Shop around for competitive quotes. A search on the Internet for “Payment Protection Insurance” or “Income Protection Insurance” will find you lots of web sites to try

Check out the conditions on the insurance. Particularly check out the exclusions which invalidate a claim. For example, some policies stipulate that you must have been working continuously for 6 months before a claim for a minimum of 20 hours a week. Seasonal or temporary work is usually excluded.

When you take the insurance out you must be in good health and know of no impending disability and not be aware that you could become unemployed. Could these exclusions apply to you? If so, the insurance will be of no use to you.

Please don't waste your money. PPI insurance is a good idea so long as it is cheap and on a monthly contract that can easily be cancelled. After all your circumstances may change. Then check the policy's exclusions to make sure the insurance is valid for your personal circumstances.

• List of Loan providers