Payment protection insurance

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Payment Protection Insurance (PPI) is a type of insurance that provides an income to maintain a borrower’s debt repayments in the event of an accident or sickness that prevents them from working, or unemployment.

PPI policies are obtainable to protect most forms of personal debt, including personal loans, mortgages, and credit card repayments. Insurance cover is frequently purchased through the lender when the finance arrangement is organized. However, stand-alone policies are available at any time.

To be qualified for PPI cover, the purchaser will typically have to be aged between 18 and 65 (or higher in some circumstances), and 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 PPI policies have a waiting period at the start of each claim before payments commence.

Once the insurer has accepted a claim, the payment periods will vary but claims are typically, paid for up to 12 months (but some may last as long as 24 months).

Whilst Payment Protection Insurance is the formal name given to this type of insurance, it is also sold under a host of other names such as: Accident Sickness and Unemployment Insurance, Accident Sickness and Redundancy Insurance, Premium Protection Insurance, Income Protection Insurance, Mortgage Payment Protection, Mortgage Payment Insurance and Loan Protection Insurance.

In fact, PPI has become a major source of income for UK banks with Datamonitor estimating that total premiums in 2005 were £5.7bn, although this was a decline from the year before. Considering that claims ration have historically been in the region of 15-20%, compared to claims rates that can be over five times as high in household and motor insurance, PPI remains a very profitable product. However, the rapid rise in UK bad debt and personal insolvencies, notably from 2005 onwards, coupled with increasing regulatory interest may have very negative implications for the long-term profitability of PPI.