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Payment protection insurance

What does Payment Protection Insurance do?

Payment Protection Insurance protects a borrower’s ability to maintain repayments and helps them avoid getting into debt should they be unable to keep up their repayments due to accident, sickness or unemployment.

Policies are available to protect most forms of personal credit, including mortgages, personal loans and credit card repayments. Cover is often purchased at the time the finance arrangement is made, but may be available at a later date or taken out as a stand-alone policy.

The cover is very easy to purchase, as there are very few eligibility requirements. Typical requirements are that you are aged 18 to 65, or higher in some circumstances, and that you are employed for at least 16 hours a week or on a long term contract or have been self-employed for a period of time.

All policies will have a period at the start of each claim that you will need to wait before payments begin. Once a claim has been accepted, benefit payment periods will vary but typically, claims are paid for up to 12 months in most cases, but some may last as long as 24 months.

Why is payment protection insurance important?

Payment protection is designed to help pay your financial commitments in the case of sickness, accident and unemployment. These circumstances have been proven to cause financial hardship due to a reduction in in come, making it difficult to maintain payments on mortgages, loans and credit cards. Here are just a few reasons why payment protection is important:

Reduction in State help
The Prospect of redundancy during uncertain times
People are borrowing more
Savings are often insufficient
Accidents do happen
Ill-health can be a problem
Reduction in State help

The level of State benefit has reduced for mortgages taken since October 1995. Borrowers now face a nine-month wait before benefit begins and even then there are additional restrictions and you may only receive limited assistance. Payment protection insurance provides a useful safety-net and could help you keep your home.

The prospect of redundancy during uncertain times

According to Government statistics, 755,000 people were made redundant in the UK between June 2002 and May 2003 - the equivalent of over 3,000 every working day. There were also, on average 1.5 million people claiming unemployment benefit during that time. A payment protection policy could have helped many through a financially difficult time.

People are borrowing more

Bank of England figures show that people are relying on credit more than ever before. At the end of July 2004, almost £1,000 billion was outstanding on mortgages, loans and credit cards. The Citizen¢s Advice Bureaux (CAB) reported that the average household has debts of £10,700 (excluding mortgages) and confirmed that it dealt with well over one million new debt enquiries last year, suggesting that many are struggling to maintain payments.

Savings are often insufficient

According to the Institute for Fiscal Studies, around half of the UK population has £600 or less savings and around a quarter of the population are £200 or more in debt. In addition, nearly half of us do not save regularly and a third have no savings at all. This lack of saving could cause financial hardship in the event of sickness, accident or unemployment.

Accidents do happen

Over 320,000 people were killed or injured on UK roads in 2000*
Nearly 3 million people suffered injuries at home in 2000 that warranted a visit to A&E*
Over 47,000 employees suffered major injuries at work in 2001, with 736 resulting in death**
These accidents could leave people unable to work for long periods of time. Whilst some employers can help financially for a while, payment protection can help for at least a year.

*Royal Society of the Prevention of Accidents (RoSPA)
**Health and Safety (HSE)

Ill-health can be a problem

When in good health, may people find it hard to envisage suffering from a major or critical illness but, if you are borrowing money, thinking about this now could save financial problems in the future. Statistics from Cancer Research UK and the British Heart Foundation show that:

Four out of ten people will be diagnosed with cancer at some stage during their lifetime*
Heart disease will kill one in four men and one in six women and remains the biggest killer in the UK**
Someone suffers a heart attack every four minutes**

*Cancer Research UK
**British Heart Foundation

Important exclusions

Consumers must not be aware of impending unemployment at the time they buy cover. Policies usually do not cover unemployment occurring within an initial period of time following the purchase of the policy. This time period is usually in the region of 60 – 120 days.

Policies exclude claims arising from pre-existing medical conditions that you are aware of or should reasonably have been aware of when the policy was purchased. Medical conditions about which you had seen, or arranged to see, a doctor about during a specified period immediately before the start date of the policy may also be excluded.

Claims that result from your own actions as a result of drug or alcohol abuse will not be covered.

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Is there anything I should ask or think about?

How long will I have to wait before policy benefit payments will be made?

There is usually a waiting period at the start of each claim before benefits are paid which may be 30, 60 days or longer. Some policies may then pay benefits from that date or from day one of the claim. Payments are usually paid one month in arrears.
How long will the policy keep paying?

Policies will typically pay out for 12 or 24 months or longer or until you return to work, if sooner. Check your policy.
Can I take out a policy at any age?

Policies usually cover you from age 18 up to a specified age of say 60 or 65, but a higher age limit may be available. Ask your insurer.
I am self-employed with my own business. Can I claim if I have to cease trading?

Some policies will cover you if you have involuntarily ceased trading because you could not find enough work. Voluntary insolvency will not be covered. You must also have informed the Inland Revenue that you have ceased trading.
I am not a permanent employee. I am employed on a contract basis. Can I claim?

Some insurers will accept your claim if you have been on a contract for at least 12 months and had it renewed at least once or worked continuously for at least 24 months.
Can I claim if I had a medical condition before I bought the cover which then reoccurs?

Some insurers will accept your claim if you had been free of symptoms for a certain length of time prior to taking out the insurance. Some chronic conditions may not be accepted due to their recurrent nature.
Can I claim for pregnancy or childbirth?

Not unless there is a serious medical complication which is diagnosed by a recognised obstetric specialist.
I only took out the insurance because I knew it was likely that I was going to become unemployed. Can I still claim when this happens?

No. If you are aware at the start date of the policy of it being likely that you will become unemployed the insurer will not pay, whether you had official notice or not.
If I am unemployed and can only get short term temporary work, will I be able to resume claim payments when the temporary work ends, without having to start a new waiting period before the claim is paid?

Some insurers may suspend your claim whilst you are working and start again when the work ends without having to wait again. The insurer will then add up all the period of payment towards the maximum period for which benefits may be paid.
What happens if I am claiming for unemployment under the cover and I become sick and unavailable for work, will I have to go through another waiting period?

Not usually, many insurers allow you to switch without having to go through another waiting period.
When I buy the cover should it be explained to me?

Yes, when you buy the cover the seller should explain the important features and ensure it is adequate for your needs.

Policy terms and conditions can vary between insurers. Always read your policy document carefully to ensure you understand what you are covered for.

If in doubt, check with your insurer.

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Other useful information and links

MORTGAGES

What help can I expect from the State to help me pay my mortgage if I am injured, sick or made redundant?

Although some help is available from the State, it may not apply to you. Even if it does, it may not be enough to prevent you falling behind with your mortgage payments.

For example –
- you will not qualify if you have a joint mortgage and only one of you loses your income – even if your partner works as little as 16 hours a week
- you will not qualify if you have savings of more than £8,000
- you will usually only start to receive help nine months after you become unemployed (earlier assistance may be available if you took out the mortgage before 02/10/95)
- you will only receive help to cover the payment of interest – capital repayments, investment premiums and insurance premiums are not included
- you will usually only receive help on the first £100,000 of your mortgage (mortgages taken out before 02/10/95 may qualify for more assistance).
Sustainable Home Ownership Initiative

Since 1999, the Council of Mortgage Lenders, the ABI and the Government have been working in partnership to help borrowers remain in their homes when financial difficulties arise. The Governments guidance to home-owners is clear.

"If you have a mortgage, or are about to take one out, you should think seriously about how you would meet your mortgage repayments if you lost your income, say through unemployment or ill health".
Minimum standards for Mortgage Payment Protection Insurance

A key area of work between lenders, insurers and the Government has been the development of more effective and better value private mortgage payment protection insurance (MPPI). This covers home-owners¢ mortgage payments if they suffer an accident, sickness or unemployment. In July 1999, the Council of Mortgage Lenders and ABI launched a new baseline specification for MPPI that establishes new improved standards for this type of insurance cover.

The Baseline specification sets out minimum standards for MPPI that have been agreed by lenders and insurers. All new MPPI policies sold after July 1999 must meet these standards and many products on the market now exceed them. All existing policies sold before this date have complied with the new standards since July 2001. One of the main benefits of the baseline specification is the improved transparency and simplicity of MPPI, so that borrowers are able to understand what protection they are being offered and how insurance can benefit them. The specification offers a number of improvements for consumers.
- An extension of cover for the self-employed and those on contracts
- A minimum of six months¢ notice of changes to policy conditions
- Fewer automatic exclusions for medical conditions
  A shorter excess period, reducing the number of days at the beginning of a claim before benefit is paid.
- A shorter standard qualifying period. This specifies the time at the start of the policy during which a claim for unemployment would be declined. The qualifying period exists to prevent claims from people who are aware of impending unemployment.
Benefits - Unemployment, disability etc.

Visit the Department for Work and Pensions website for up to date guidance on available benefits.
Consumer attitudes to mortgage payment protection insurance

In March 2001 the ABI published research carried out by NOP Financial. This looked at consumer attitudes to, and awareness of, all types of creditor insurance especially mortgage payment protection insurance (MPPI), insurance covering other loan repayments and cover for credit and store cards. It produced a number of findings.
- Those who had made a claim on a payment protection policy were overwhelmingly satisfied with both the payout and the smooth running of the process. Almost three-quarters of those receiving claims payments felt it had been easy.
- A significant and worrying proportion of consumers - one in five - believed they could rely on the Government to provide them with financial assistance if they were unable to work. For many, this would not be a realistic option. State benefits to support mortgage repayments, for example, are capped and means-tested and, even if borrowers are eligible, they have to wait up to nine months before receiving the first benefit payment.
- Around a third of those without payment protection insurance said they would rely on savings and investments to pay regular bills if they were unable to work. This seemed relatively risky given the low level of savings in the UK (£750 per household, on average).

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ABI Creditor Insurance Consistent Interpretations

As part of the industry’s attempts to improve the service customers receive from their Creditor product, the ABI Creditor Insurance Committee have launched a project to draw up a range of Consistent Interpretations; principles which members will adopt to standardise how customers are treated during a period of claim.

What Happens if my lenders scheme is transferred to another insurer?

The ABI Creditor Insurance Committee has established an understanding that Member companies will use the transfer of scheme guidelines created by Protect (The Trade Association of UK Creditor Insurers) wherever there is a change of insurer to a lender¢s scheme. Payment Protection Insurance, also sometimes referred to as Creditor Insurance, is often underwritten and administered by insurers on behalf of a particular Bank, Building Society, or other lenders. The guidelines are common sense principles to ensure existing policyholders do not suffer as a result of any change of insurer. The guidelines do not replace policy conditions or consumer rights. Protect has also offered to arbitrate in the event of disputes of scheme transfers, if required.

Information on this page has been re-produced from the Association of British Insurers

Published November 2005

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