Payment Protection Insurance: How It Works and What to Expect

Payment protection insurance is a type of insurance that helps cover loan repayments if you're unable to work due to illness or injury.

This insurance typically provides a lump sum or regular payments to help cover loan repayments, usually up to a certain amount.

The cost of payment protection insurance varies depending on the policy and the lender, but it's often added to the loan amount as a fee.

You'll usually have to pay a premium for payment protection insurance, which can range from a few pounds to several hundred pounds per year.

Payment protection insurance is a type of coverage that lets you stop making minimum monthly payments on a credit card or loan debt during a period of involuntary unemployment or disability.

It may also cancel the remaining balance on the account if you die.

This type of insurance is often referred to as a debt protection plan.

It's usually offered by credit card issuers and other lenders as an additional feature on your account.

A monthly fee is typically charged based on the amount owed and the situations covered.

A payment protection plan is an optional product sold by credit card companies that acts as a type of short-term insurance, allowing you to stop making your payments if you experience a hardship.

To qualify for a payment protection plan, you must meet certain criteria set out by your issuer or lender, such as having been employed for at least a few months prior to enrolling.

Some lenders may not cover job loss if you were self-employed, worked for a family member, had seasonal work, or had your hours reduced.

You may be precluded from signing up for protection if your disability took place too recently relative to when your plan would kick in.

To use your benefits, each creditor or lender will have different requirements for what types of events allow you to do so.

For example, Discover offers two options: a short-term plan and long-term plan, each with its own criteria.

Under the long-term plan, you can qualify for up to 24 months of debt protection if you face a major hardship such as hospitalization, death of a spouse or immediate family member, job loss, or disability.

Here are some examples of circumstances in which a payment protection plan covers:

You may be expected to produce certain documentation to prove your disability, job loss, or other condition.

It's essential to understand the caps on your benefits, such as how long they last, and to review the rules, fees, and other details before enrolling.

Purchasing a Payment Protection Plan can be done by cardholders who are charged a monthly fee, either as a flat fee or as a percentage of the statement balance.

Card issuers often enroll new account holders in these products, and existing account holders can purchase the plan by telephone, mail, or through the credit card issuer's website.

To qualify for benefits, you must be under the care of a physician for an accident or injury that makes you unable to work in any job you're qualified for, not just your current job.

You must also have been working for several months at the time you signed up for the payment protection plan, meaning you can't purchase it if you're already unemployed.

Here are the requirements to qualify for a payment protection plan's coverage:

To qualify for a payment protection plan, you'll need to meet certain requirements. You must be under the care of a physician for an accident or injury that makes you unable to work in any job you're qualified for.

You can't purchase a payment protection plan if you're already unemployed, meaning you must have been working for several months at the time you signed up.

Your disability must have lasted for more than 30 consecutive days before payment protection will become active.

If you meet these requirements, coverage will only last for a limited period of time, such as 12 months, regardless of whether your disability extends beyond that period.

Here are the key requirements to qualify for a payment protection plan in summary:

Purchasing a Payment Protection Plan can be done in various ways. You can purchase the product when you apply for a new credit card or add it to an existing credit card account.

Card issuers often enroll new account holders in these products through the credit card application or when you activate the credit card. This is usually done automatically, so be sure to review your account terms carefully.

Consumers can also purchase the product by telephone, mail, or through the credit card issuer's website if you're an existing account holder.

Payment protection insurance comes in two basic forms: debt suspension and debt cancellation. Debt suspension allows you to stop making payments for a period of time if you meet certain criteria, such as losing your job or becoming disabled.

Debt cancellation ends your obligation to pay all or part of the remaining debt, typically in the event of death. This can bring significant relief in times of crisis.

If you're considering a payment protection plan, you may want to think twice. The monthly fee, which can be 1% or 2%, can add up quickly. Instead, you could put that money into an emergency fund, which can be used for many purposes besides repaying debt.

Here are some alternative ways to protect yourself financially:

Payment protection comes in two basic forms. Debt suspension allows the cardholder to stop making payments for a period of time if they meet certain criteria, such as losing their job or becoming disabled. This can provide temporary relief in times of financial hardship. Debt cancellation ends their obligation to pay all or part of the remaining debt, typically in the event of death.

If you're considering a payment protection plan, you might want to think twice and explore other options. A 1% or 2% monthly fee can add up quickly, so it's essential to weigh the costs.

Putting that money into an emergency fund is a great idea. An emergency fund can be used for various purposes, and it's yours to keep if you never end up spending it.

Another good use of the money could be to purchase long-term disability insurance and/or term life insurance. They can cover the same risks as a payment protection plan and are also more flexible in terms of how the money can be used.

Monitoring your credit reports for suspicious activity is crucial. Report any suspected fraud to the three major credit bureaus, and you can also set up a free fraud alert with one of them to monitor unauthorized financial activity.

Here are some alternatives to payment protection plans:

You can cancel a PPI policy at any time. If you pay off your loan or hire-purchase agreement early, cancel your credit card, or 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.

To make a claim under an existing PPI policy, you'll first need to check your policy document to see if your reason for being out of work is covered.

Some policies pay out if you're made redundant, but on certain conditions, such as if you take voluntary redundancy.

You should contact your lender to discuss the next steps in the claims process. They may ask you to complete a claims form, so make sure to fill it out accurately to avoid delays or refusal of your claim.

If you're unsure about any information requested on the form, it's best to contact your lender for clarification.

You may be required to submit supporting documentation, such as medical certificates or proof of redundancy, to support your claim. Your lender will advise on what specific documents are needed.

Canceling a PPI Policy can be done at any time. If you pay off your loan or hire-purchase agreement early, you can cancel the policy.

You can cancel your credit card, which will also cancel the PPI policy. Simply ask your lender to cancel your direct debit and the policy will be cancelled.

If you paid the insurance 'up front', you may be entitled to a refund of the remaining term.

Payment protection insurance (PPI) has been involved in several scandals and has been heavily regulated. In the UK, PPI was mis-sold on an industrial scale for over a decade, with banks and third-party brokers selling policies that were not necessary or not fully explained to customers.

The sale of PPI policies was often encouraged by large commissions, making the bank or provider more money than the interest on the original loan. This led to companies developing sales scripts that only mentioned the loan was "protected" without mentioning the nature or cost of the insurance.

Several high-profile companies were fined by the Financial Conduct Authority for mis-selling PPI, with Clydesdale Bank receiving the largest ever fine of £20,678,300. Other companies, such as Alliance and Leicester, were fined £7 million.

To prevent future mis-selling, the Competition Commission introduced rules in 2011, including providing adequate information when selling PPI and prohibiting selling PPI at the same time as the credit agreement. These rules came into force in October 2011.

The UK banks set up multibillion-pound provisions to compensate customers who were mis-sold PPI, with Lloyds Banking Group setting aside £3.6 billion and HSBC having provisions of £745 million. By 2016, the total compensation had risen to £40 billion.

Some key dates to note include: