Payment protection insurance

Payment protection insurance (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. This may be as a result of illness, accident, death or unemployment and will be covered on your policy.

Do you have to buy it?

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.

What does it cover?

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 may only apply for a limited period of time. Remember that the minimum repayment amount is not enough to reduce your balance quickly.

Some of these policies only pay out after a certain number of weeks, so you may want to build up a rainy day fund just in case – ideally, three months’ salary.

If you do not have payment protection insurance and miss a loan or credit card payment, it could affect your credit rating.

Do you need this cover?

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 lifeserious 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
  • Employed for less than 16 hours a week
  • Aware you may become unemployed
  • Self-employed and go out of business
  • A temporary/contract worker and you lose your job
  • Aware of an existing medical condition
  • 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
  • Take voluntary redundancy
  • Claim during the first three or six months of taking out the policy

Things to consider before you take out PPI

Before you take out PPI you should ask yourself:

  • Do I really need this type of cover?
  • What is the full cost of cover?
  • 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 PPI, 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, PPI 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, 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 pay the minimum payment for a limited period of time.

How much does it cost?

With a personal loan, the cost of PPI 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.

Can you claim more than once?

If you make a successful claim on your policy, you may be able to make further claims, depending on the type of policy you have. For example, if the policy pays out due to critical illness, cover may end automatically and you would stop paying premiums. However, if you could make further claims in the future, you can continue to pay premiums and the policy remains in place.

Before you take out a policy, check whether you can claim more than once, and if so, under what circumstances. Also, if you make a claim, find out what effect this has on the policy, particularly whether you would be able to make another claim in the future and if so, under what circumstances.

Can you cancel a PPI?

You can cancel PPI 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.

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