Payment Protection - do you need it? (Other Personal Loans)

Member Name: KirkcaldyDad

Product:	Other Personal Loans
Date:	03/06/02 (1237 review reads)
Rating:

Advantages: peace of mind

Disadvantages: costs money

Virtually nobody offers you any sort of loan these days without suggesting you should take out Payment Protection for your repayments. For many of us it tends to be a bit of an afterthought and a surprise, and you might come away thinking you have been bullied into it. So here are my thoughts on the subject.

What is Payment Protection?
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This is an insurance policy which will cover your payments in specific circumstances. Like all insurances, you will hope never to have to make a claim, but it gives you the security of knowing that you have some protection if the unexpected happens.

The three areas which are insured are usually:
- illness or accident which keeps you from work
- unemployment (but not voluntary redundancy, retirement or maternity leave)
- death

Most policies cover all three of these areas, but some let you choose just illness and accident or just redundancy.

Payment protection is offered with all kinds of loans, including mortgages, credit cards, personal loans and HP credit agreements (a loan for a single purchase taken out though a shop, car dealer etc.).

Mortgage cover is usually for a fixed monthly amount, part or all of which will be paid directly to your mortgage account in the event of a claim. You generally pay the premium monthly, as for your buildings insurance, and you should be able to vary the level of cover up or down quite easily with a quick phone call to your lender. It would be sensible for mortgage lenders to prompt you to review the level of cover when interest rates change, but in my experience they never do.

Credit card cover is usually charged as a proportion of the outstanding balance on your card each month, so it will vary each month. Typically the charge is around 70p for each £100 balance.

For personal loans and HP credit agreements the premium is usually charged up front and added to the loan. The side eff
ect of this is that you end up paying interest on the premium. Also, if you pay off the loan early, you will get little or none of that premium refunded.


Must you have it?
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In most cases this insurance is optional, so you can decide not to take it.

For credit cards and mortgages you need to positively opt-in. Credit card companies are very good at reminding you how strongly they recommend that you take out the cover, but you do always have to tick a box on the application or fill in an additional form to make it happen. Mortage lenders tend to ask you when you first take out the mortgage, then it's not mentioned again until you move house or move your mortgage. For both mortgages and credit cards you should be able to stop and start cover quite easily if you wish.

Payment protection for loans tends to be presented differently. For personal loans, often the version of the loan without the payment protection is shown less prominently on quotes, or may not even be quoted if you do not specifically ask for it. All you will generally see are the different total monthly payment rates. You won't usually see the insurance premium quoted separately, so it's not immediately obvious quite how much the premium really is. If you take out protection you have it for the life of the loan; you cannot decide to add or remove it later.

For HP credit, the protection may not be mentioned at all in your discussions leading up to the sale. The guy selling you the finance is not a financial expert - he's a salesman. He sells cars, or windows, or widescreen televisions. Even if he does understand the details, he's not going to risk his deal by drawing your attention to them. He tells you the price of the car, the headline APR for the finance, looks up the monthly payments on a chart and doesn't mention the arrangement fees or payment protection premium that he assumes you will be happy
to pay. I think there's a whole OP in those HP credit agreement forms, but it's sufficient to say here that while the premium is there on the form, you may only become aware of it when you try to decipher the tiny scrawl on that fourth-layer carbon copy that the salesman gave you before he went home to count his commission. I know. It's happened to me twice that I remember, and I've a suspicion that it happened on at least one other occasion which has been erased from my memory! Anyway, you should still make a conscious decision whether or not to take it.

Find out what it costs
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I have no doubt that payment protection is the right thing for some people and for some loans. I have it for my mortgage, and I worry about not having it for other things. But my advice is to think very hard about whether or not you really want it. Be very aware of what it is going to cost you, and what the benefits are.

Always, always, always, get a quote for the finance without payment protection. Think of the payment protection as an option that you may or may not take up. See how it is going to affect your monthly outgoings, and weigh up whether you think it is worth the additional cost. In the case of a personal loan or HP, try to get the cost of the payment protection separated from the loan and interest payments, so you can clearly see what the policy costs you, and compare with other lenders. Lenders make a big thing of the headline interest rate they offer, but payment protection premiums rates are never mentioned except in the small print, and they can vary quite widely. What really counts in the end when you compare loans is the total you will pay to clear it, not the APR. This total does generally appear on a quote (I think it probably has to by law), but is often not very prominent.

To give an idea of the variation in costs, I just got a couple of quick quotes for personal loans from some
banks' web sites. On a loan of £5000 over 3 years one bank wanted £19 extra per month to add payment protection. Another bank wanted an extra £25 per month for the same cover. That difference of £6 a month might not seem like a lot, when the overall monthly payments are in the region of £180, but £6 a month is £216 over the life of the loan, or £72 a year. If you thought your car insurance was costing £72 too much you might do something about it, so why not your payment protection insurance as well?

Put another way, that £6 per month is equivalent to about 3% on the APR.

So if your particular lender charges a high premium it might just take the edge off the great headline APR that they used to get your attention in the first place. You might find it actually costs less to go with a lender who offers a slightly higher APR but has a lower payment protection premium.

The cost for Mortgage payment protection is much easier to see. It will usually be a separate policy, and you can get quotes for a number of options (e.g. unemployment cover only, cover for a maximum of 12 or 24 months payments, and one, two or three months waiting times before any payout starts). You may pay the premium combined with your mortgage payment, but you should get a separate quote, and separate insurance schedule paperwork.

For credit cards it's also straightforward, being a fixed percentage of your balance. Remember that this premium will go down each month as you clear off the balance. So if you have put that £5000 purchase on a card and budgeted to clear it in three years without puting any new purchases on the card, the initial premium will be around £35 per month, but will reduce as you pay off the balance.

Other checks to make
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Check how long you have to off work before the policy pays out. Many will pay out after one month, but it can be as high as three months. This makes a huge difference
to the premium, and understandably so - you are much more likely to be ill or unemployed for one month than three. A short period here is not always the best, as it means increased premiums. If your employer has a generous sick-pay scheme or you generally have enough in savings to see you through more than a single month, consider looking for payment protection that starts paying out after two or three months, rather than just one. The standard policies that go with personal loans and HP agreements don't usually give you an option to change, but a stand-alone policy or one attached to a mortgage usually will.

Check when cover starts. Unemployment cover usually requires you to be continually employed for at least six months before you are covered. They will happily sell you the policy, but may catch you with this one if you make a claim. Check whether this continuous employment condition must be with a single employer. If you have recently changed jobs, or think you might in the near future, you could end up paying a premium when you don't qualify for cover. Also, you are not usually covered for unemployment which occurs in the first two or three months after the start of the insurance. So if it's a twelve month policy you will probably only be getting ten months unemployment cover.

Check how much the policy pays. For a loan with regular payments it will almost certainly just cover exactly those payments. For a credit card, the payout will be some percentage of the outstanding balance on your last statement when the claim starts. Again, a quick look at some web sites shows that different card issuers have different rates. Nationwide charge only 60p per £100 and pay 10% per month if you claim. American Express charge 72p per £100, but only pay out 5% per month.

Be sure you have the right person covered. If you are relying on the salary of a generous wife/husband/partner/friend to pay off your loan, you probably wan
t to protect their income. If you have two salaries coming into your household, you may decide that you could cope if you lose the lower salary but not the higher salary, so it would be better to have the payment protection in the name of the higher earner.

Check whether you are partially covered by any other policies. Many people have life insurance through their employers or as separate policies, and some also have permanent health insurance.

Alternatives
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You can get the same protection through a number of other types of insurance policies. The advantage of buying a separate policy, rather than the standard one offered with your loan is that you can tailor it to your personal worries, circumstances etc. I haven't done the calculations, but I'll bet it works out cheaper to have one policy rather than several individual ones for each loan, credit card, mortgage etc.

One alternative is an income protection policy. You choose the monthly amount you want to be covered for, pay your premium, and if you are unable to work you get the amount you are covered for in cash. You can use that cash in any way you like. Note that there is no life assurance component, but then you may already have separate life insurance, which would pay the loan if you die.

If it's sickness you are most worried about, look at permanent health insurance policies. These are a bit like income protection, but are just for the illness and accident part. They don't just pay out for a short 12 or 24 month period when you are ill, but pay out forever - or at least until you are of an age when your pension is expected to start. The payout may be a flat rate or be indexed to keep up with inflation.

Personally, I don't have separate payment protection, but I do have a policy linked to my mortgage. I have had permanent health insurance in the past, but dropped it when an employer introduced similar cover. H
aving written all this, I will be reviewing whether the policy linked to my mortgage is giving me the right cover and the best value. I will update with any further information as I find it.

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