Payment protection insurance (PPI) has deservedly earned itself a bad name.
It's designed to pay your loan, credit card or mortgage repayments, or even an income, for six to 24 months when you either fall ill, have an accident or get made redundant. Unfortunately, for the most part it has been vastly over-priced and over-sold, and the many exclusions have not been clearly explained to customers, some of whom have been sold policies they'll never be able to claim on.
One contributor to lovemoney.com, Cliff D'Arcy, campaigned against this insurance for many, many years, and the story slowly spread. That's why billions of pounds in premiums are currently being paid back, with 90% of claimants getting their money returned to them. I suggest you look at your own paperwork to see if you are, or have been, paying this insurance. Unless you shopped around for it, you're probably being ripped off. Cancel it and consider reclaiming your payments. You could get thousands of pounds.
Consider alternatives first
So given this background, does it ever make sense to buy PPI?
Let’s answer that question by looking at income payment protection insurance (IPPI). It pays you an income when something goes wrong rather than merely paying your debts.
I’d say straightaway that IPPI would never be my top priority when I’m planning for any potential redundancy in the future. The best thing to do is put money into an emergency savings account. It's more dependable than PPI, it's likely to be cheaper in the long run, and it's more flexible because you can use the money to pay for other emergencies too.
Equally importantly, you should make yourself invaluable to your employer. Try to be noticed as one of the 10% who put in the most effort. Also improve your skills and CV. Hard work and building skills are the best defences against redundancy.
There is no comprehensive unemployment insurance
If you still want to go down the insurance route, be aware that Income payment protection insurance is rather like travel insurance: it's chock full of exclusions. The best policies are far better than the worst, but even those are riddled with reasons why the insurer won't pay out.
However, just like travel insurance, IPPI can still be worth it so long as the price you pay reflects the limited cover. That's why travel insurance is so damn cheap, and yet it can pay out tens of thousands of pounds in some circumstances. Unemployment insurance can also pay many, many thousands.
Before you buy, you need to understand at least the main massive exclusions so that you can better judge if it's worth it for you. Looking through the small print of a few contracts, here are reasons I have found that you can't usually claim:
- If you were aware of impending redundancy, potential job losses, or reduced pay or hours, particularly in your department or division.
- If you lose your job or become aware of potential job loss during the first 60 or 120 days. In other words, you pay your premiums for the first few months but have no benefit.
- If redundancy is voluntary.
- If you're not officially register as unemployed.
- If you're 17 or younger, or 65 or older.
- If you work less than 16 hours a week.
- If you're temporarily employed.
- If you're dismissed during your probationary period.
- If you're on a fixed-term contract and can't demonstrate that it would probably have been renewed. (You'll need other evidence of previous work as well.)
- If you're self-employed but haven't ceased trading. (Some policies also require that your business has been in liquidation or even become insolvent before you can claim.)
- If you haven't been working in the UK for the past six or 12 months at the start of the policy or at the point of the claim.
Consider the cost
No matter how many exclusions an insurance has, it could be worth it if the price is right. Currently, unemployment insurance prices are high because businesses are struggling and so the chances of unemployment are higher.
To get £1,500 of monthly cover, paying out for 12 months after four-months of redundancy, a 30-year-old might have to pay a full £40-£60 per month. This is a great deal cheaper than the rip-off cover most people have been sold by their lenders, but it's hardly a bargain. That's another reason why emergency savings are generally a better way to protect yourself.
In my tests, British Insurance tends to come out cheapest and it appears to have roughly competitive terms and conditions.
Time for some contemplation
You have now considered the exclusions, whether you could save instead, and what you can do to make yourself more attractive to an employer. You should now consider what you think the chances are of being made redundant. If you consider your job lower risk, the insurance is still probably not a good idea.
Bearing all that in mind, I think there's probably just a small minority of people who should buy this insurance at these prices.
Make sure you buy the right insurance!
Most IPPI policies also include protection against accident and sickness, whether you want to fork out for that or not. If you want to protect yourself against accident and ill health, I write about a far better insurance in Get £100,000 if you can't work.
Try not to get confused by its almost identical name: income protection insurance. That's IPI with just one 'P'. Find out more in Protect yourself from the spending cuts.
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