Banks are banned from selling high-cost insurance
The financial services regulator has told banks to stop selling single-premium Payment Protection Insurance (PPI) alongside loans by the end of May. In its investigation of PPI, the Competition Commission had concluded that the banks made huge profits from selling such single-premium policies. Now the FSA has told the banks to stop it.
But just because the regulator has stopped banks from selling payment protection insurance alongside loans doesn’t mean you shouldn’t buy it. On the contrary. If you take out a personal loan, it’s very comforting to know that if you’re unable to work through illness or are made redundant, your loan repayments will be met. But don’t buy it from your bank.
The problem identified by the CC was twofold: the ‘inertia sale’ tactics used by banks, and the fact that their premium rates were up to three times what you could get from independent insurers. When the insurance is unbundled from the loan, you can easily see this difference in cost, but when – as is the case with single premium policies - it’s bundled with the loan, you simply don’t notice.
There are plenty of standalone monthly premium PPI policies available from independent insurers for every type of loan - personal loan, credit card balance or mortgage. And most of these policies are significantly cheaper than the policies still being sold by lenders offering personal loans.
PPI is a surprisingly simple and easy insurance to buy on-line, so you don’t have to buy it alongside a personal loan. You just need to be aware that PPI has two components, each of which you can buy separately. Many people will want both, but some people will only be eligible for or need one part.
The two sides of PPI
Accident and Sickness or Disability cover. Meets your monthly loan repayments for a period (usually a year) if you are off work through illness or accident for more than 30 days.
Redundancy cover. Meets your loan repayments for a period of a year if you are made redundant, often with a one-month waiting period. The cover is invalidated if you take it out in the knowledge that you will be made redundant. This cover is worth little for the self-employed who can only claim on it if they de-register their business and register as unemployed.
