Payment Protection Insurance (PPI) is an insurance product that is designed to cover a debt that is currently outstanding. It has been widely sold in banks as an 'add-on' to a loan agreement at point of sale and covers the borrower if they are unable to meet their monthly payments due to accident, sickness, unemployment or death1.
PPI usually only pays out for a short period of time for example twelve months after which the borrower must find other means to meet the payments. There has been a lot of controversy surrounding PPI in recent months and it is important to understand the Income Protection Insurance and Payment Protection Insurance are two very different products.
| Income Protection | Payment Protection Insurance | |
| What does it cover? | A percentage of your Earnings | Payments on a loan or other credit agreement |
| When will it pay out? | If you are unable to earn a living as a result of illness or accidental injury. | If you are unable to make payments on your credit agreement as a result of illness or accidental injury and for some policies unemployment and death. |
| How much benefit do I get? | Typically between 50% & 70% of your Gross Income. | The amount needed to cover the credit agreement on which the policy was taken out |
| How long does it pay out for? | An IP contract pays out until you are able to return to work or reach retirement age. The benefit will also cease in the event of your death. | Usually the payment continues for 12-24 months at which point you must find an alternative means to meet your repayments |
| What can I spend it on? | IP is designed to help you meet your essential outgoings if you cannot work due to illness or accidental injury. It is up to you how you spend any benefit you receive from your IP contract. | This must be spent on repaying the credit agreement it is linked to and is usually paid direct to the lender on your behalf. |
| How is it Underwritten? | IP is largely underwritten on your Medical History. Certain IP providers like Cirencester friendly do not add additional premiums based on Gender, Occupation, smoking or hazardous pursuits. | PPI is generally accepted conditional on the exclusion of back related complaints, depression and all existing medical conditions. |
1. This may vary depending on the Payment Protection Contract.