Payment protection insurance (PPI)
Payment protection insurance, or PPI, is insurance that will pay out a sum of money to help you cover your monthly repayments on mortgages, loans, credit/store cards or catalogue payments if you are unable to work for certain reasons covered by your policy, such as death, illness or accident, or you become unemployed through no fault of your own.
Do you have to buy it?
What does it cover?
Do you need this cover?
Things to consider before you take out payment protection insurance
How much does it cost?
Can you cancel a payment protection insurance policy?
No you don't. Many lenders offer this sort of policy when you apply for a loan. You need to weigh up the benefits against the cost of the cover. Under the Central Bank’s Consumer Protection Code lenders should quote for it separate to your loan and must use separate application forms for the loan and the insurance.
Your insurance company will pay the monthly repayments (or a portion of them) for a fixed period of time. For credit cards, this insurance usually only covers the minimum repayment amount (2% to 5% of the full amount you owe) and only for a limited period of time. Remember that the minimum repayment amount is not enough to reduce your balance very quickly.
Some of these policies will only pay out after a certain number of weeks, so you may want to have a rainy day fund built up just in case - ideally, three-months salary.
If you did not have payment protection insurance and missed a loan or credit card payment, it could affect your credit rating.
You may not need this cover if:
- You have a regular guaranteed income
- You are entitled to a period of paid sick leave from your employer
- You are in a secure job, with little risk of redundancy
- You have a similar policy either separately or through your job or sports club
- You have existing insurance such as life, serious illness or income protection insurance.
Check you are eligible to take out this type of cover in the first place and decide if you really need it. Make sure you read all exclusions before you take out a policy.
You may not be eligible to make a claim if you:
- Are under 18 or over 65
- Work less than 16 hours a week
- Are aware you may become unemployed
- Are self-employed and go out of business
- Are a temporary/contract worker and you lose your job
- Are aware, or should be aware, of an existing medical condition
- Are unable to work because of certain common conditions, such as stress or backache
You may not be able to claim for redundancy if:
- You work in a family business
- You take voluntary redundancy
- You claim during the first three or six months of taking out the policy
Before you take out payment protection insurance you should ask yourself:
- Do I really need this type of cover?
- What is the full cost?
- Am I already in a sick-pay scheme?
- What are my chances of being made redundant?
- If I were unable to work, would the policy save me from major financial distress or just from minor discomfort?
- Would I be better off with alternative cover such as life assurance, income protection, personal accident insurance or serious illness cover?
- Am I entitled to accident or illness cover through my job, sports club or other professional association?
If you decide to take out payment protection insurance, make sure you check the following:
- The total cost of insurance over the term. While the monthly payment might seem cheap, it can add up over the term of a loan. For example, for a five-year €10,000 loan, payment protection could cost up to €2,000.
- The policy conditions to see what is covered and what is excluded. If you suffer an illness that is not covered, for example, the policy would not pay anything in the event of a claim. Some policies do not include redundancy cover, while others do.
- Do you have to pay the insurance up-front? Some lenders add the full cost of the insurance into your original loan. This costs you more because you pay interest not only on the loan, but also on the premium.
- What benefit would you receive? Many policies only cover a maximum of one year's repayments and only cover a certain period of time. Cover for credit cards often only pays the minimum payment for a limited period of time.
With a personal loan, the cost of Payment Protection Insurance is usually around 10% of your loan repayment. With a credit card, the cover usually costs about 70c per €100 outstanding each month. If you usually pay off all your credit card balance each month and take out PPI, you may be paying for cover that you don't need.
Can your premium increase?
Yes. Check with your provider and ask about the circumstances that could lead to the increase.
You can cancel payment protection insurance at any time. If you pay off your loan or hire-purchase agreement early, cancel your credit card or if you simply decide you no longer need this cover, ask your lender to cancel your direct debit and cancel the policy. If you paid the insurance ‘up front’ you may be entitled to a refund of the remaining term. Ask your lender about this.