Payment protection insurance

Payment protection insurance (PPI), also known as credit insurance, credit protection insurance, or loan repayment insurance, is an insurance product that enables consumers to ensure repayment of credit if the borrower dies, becomes ill or disabled, loses a job, or faces other circumstances that may prevent them from earning income to service the debt. It is not to be confused with income protection insurance, which is not specific to a debt but covers any income. PPI was widely sold by banks and other credit providers as an add-on to the loan or overdraft product.[1]

PPI usually covers payments for a finite period, typically 12 months, in which case they might be marketed as short-term income protection insurance (STIP).[2] For loans or mortgages this may be the entire monthly payment, for credit cards it is typically the minimum monthly payment. After this point the borrower must find other means to repay the debt, although some policies repay the debt in full if they are unable to return to work or are diagnosed with a critical illness. The period covered by insurance is typically long enough for most people to start working again and earn enough to service their debt.[3] PPI is different from other types of insurance such as home insurance, in that it can be quite difficult to determine if it is right for a person or not. Careful assessment of what would happen if a person became unemployed would need to be considered, as payments in lieu of notice (for example) may render a claim ineligible despite the insured person being genuinely unemployed. In this case, the approach taken by PPI insurers is consistent with that taken by the Benefits Agency in respect of unemployment benefits.[4]

Most PPI policies are not sought out by consumers. In some cases, consumers claim to be unaware that they even have the insurance. In sales connected to loans, products were often promoted by commission based telesales departments. Fear of losing the loan was exploited, as the product was effectively cited as an element of underwriting. Any attention to suitability was likely to be minimal, if it existed at all. In all types of insurance some claims are accepted and some are rejected. Notably, in the case of PPI, the number of rejected claims is high compared to other types of insurance. The rare customers who deliberately seek out the policy may have little recourse when they discover it is of no benefit.[5]

As PPI is designed to cover repayments on loans and credit cards, most loan and credit card companies sell the product at the same time as they sell the credit product. By May 2008, 20 million PPI policies existed in the UK with a further increase of 7 million policies a year being purchased thereafter. Surveys show that 40% of policyholders claim to be unaware that they had a policy.

"PPI was mis-sold and complaints about it mishandled on an industrial scale for well over a decade",[6] with this mis-selling being carried out by not only the banks or providers, but also by third party brokers. The sale of such policies was typically encouraged by large commissions,[7] as the insurance would commonly make the bank/provider more money than the interest on the original loan, such that many mainstream personal loan providers made little or no profit on the loans themselves; all or almost all profit was derived from PPI commission and profit share. Certain companies developed sales scripts which guided salespeople to say only that the loan was "protected" without mentioning the nature or cost of the insurance. When challenged by the customer, they sometimes incorrectly stated that this insurance improved the borrower's chances of getting the loan or that it was mandatory.[8] A consumer in financial difficulty is unlikely to further question the policy and risk the loan being refused.

Several high-profile companies have now been fined by the Financial Conduct Authority for the widespread mis-selling of PPI. The Financial Conduct Authority (FCA) fined Clydesdale Bank £20,678,300 for serious failings in its PPI complaint handling processes between May 2011 and July 2013. This is the largest ever fine imposed by the FCA for failings relating to PPI. Clydesdale agreed to settle at an early stage of the FCA's investigation and therefore qualified for at 30% stage 1 discount. Were it not for this the FCA would have imposed a financial penalty of £29,540,500. Alliance and Leicester were fined £7m for their part in the mis-selling controversy, several others including Capital One, HSBC Finance and Egg were fined up to £1.1m. Claims against mis-sold PPI have been slowly increasing, and may approach the levels seen during the 2006–07 period, when thousands of bank customers made claims relating to allegedly unfair bank charges. In their 2009/2010 annual report, the Financial Ombudsman Service stated that 30% of new cases referred to payment protection insurance. A customer who purchases a PPI policy may initiate a claim for mis-sold PPI by complaining to the bank, lender, or broker who sold the policy.[9]

Slightly before that, on 6 April 2011, the Competition Commission released their investigation order[10] designed to prevent mis-selling in the future. Key rules in the order, designed to enable the customer to shop around and make an informed decision, include: provision of adequate information when selling payment protection and providing a personal quote; obligation to provide an annual review; prohibition of selling payment protection at the same time the credit agreement is entered into. Most rules came into force in October 2011, with some following in April 2012.

The Central Bank of Ireland in April 2014 was described as having "arbitrarily excluded the majority of consumers" from getting compensation for mis-sold PPI, by setting a cutoff date of 2007 when it introduced its Consumer Protection Code. UK banks provided over £22bn for PPI misselling costs – which, if scaled on a pro-rata basis, is many multiples of the compensation the Irish banks were asked to repay. The offending banks were also not fined which was in sharp contrast to the regime imposed on UK banks.[11] Lawyers were appalled at the "reckless" advice the Irish Central Bank gave consumers who were missold PPI policies, which "will play into the hands of the financial institution."[12]

Calculations

The price paid for payment protection insurance can vary quite significantly depending on the lender. A survey of forty-eight major lenders by Which? Ltd found the price of PPI was 16–25% of the amount of the debt.

PPI premiums may be charged on a monthly basis or the full PPI premium may be added to the loan up-front to cover the cost of the policy. With this latter payment approach, known as a "Single Premium Policy", the money borrowed from the provider to pay for the insurance policy incurs additional interest, typically at the same APR as is being charged for the original sum borrowed, further increasing the effective total cost of the policy to the customer.

Payment protection insurance on credit cards is calculated differently from lump sum loans, as initially there is no sum outstanding and it is unknown if the customer will ever use their card facility. However, in the event that the credit facility is used and the balance is not paid in full each month, a customer will be charged typically between 0.78% and 1% or £0.78 to £1.00 from every £100 which is a balance of their current card balance on a monthly basis, as the premium for the insurance. When interest on the credit card is added to the premium, it can become very expensive. For example, the cost of PPI for the average credit card in the UK charging 19.32% on an average of £5,000 each month adds an extra £3,219.88 in premiums and interest.

With lump sum loans PPI premiums are paid upfront with the cost from 13% to 56% of the loan amount as reported by the Citizens Advice Bureau (CAB) who launched a Super Complaint into what it called the Protection Racket.

PPI premiums as proportion of loan: cases reported[13]
Loan TypeLoan AmountPPI premiumPremium % of loan
Unsecured personal loan£8,993£2,21725%
Unsecured personal loan£11,000£5,13347%
Hire purchase for car£5,059£2,15743%
Hire purchase for car£6,895£2,31734%
Unsecured loan£5,600£74413%
Secured loan£25,000£12,12749%
Secured loan£35,000£10,15029%
Conditional sale for car£4,300£2,39456%

When interest is charged on the premiums, the cost of a single premium policy increases the cost geometrically. The above secured loan of £25,000 over a 25-year term at 4.5% interest costs the customer an additional £20,221.74 for PPI. Moneymadeclear[14] calculates the repayment for that loan to be £138.96 a month whereas a stand-alone payment protection policy for say a 30-year-old borrowing the same amount covering the same term would cost the customer £1992 in total, almost one-tenth of the cost of the single premium policy.

PPI claims

Payment Protection Insurance can be extremely useful; however, many policies have been mis-sold alongside loans, credit cards and mortgages. PPI mis-selling may leave the borrower with a policy of no use to them if they need to make a claim. Reclaiming PPI payments and statutory interest charges on these payments is possible either by the policyholder or via a lawyer or claims management company.

If the borrower at the time of the PPI claim owes money to the lender, the lender will usually have a contractual right to offset any PPI refund against the debt.

The first ever PPI case was in 1992–93 (Bristol, 93/10771). It was judged that the total payments of the insurance premium were almost as high as the total benefit that could be claimed. A 10-year non disclosure clause was put in place as part of the settlement. After 10 years, a copy of the judgement was sent to the Office of Fair Trading and Citizens Advice Bureau. Soon after, a super complaint was raised.[15]

The judicial review that followed hit the headlines as it eventually ruled in the favour of the borrowers, enabling a large number of consumers to reclaim PPI payments. To date, £38.3 billion has been repaid to consumers (May 2020).[16]

In 2014, a PPI claim from Susan Plevin against Paragon Personal Finance revealed that over 71% of the PPI sale was a commission. This was deemed as a form of mis-selling. The Plevin case has caused the banks and the Financial Ombudsman to review even more PPI claims.

PPI claim companies are currently one of the most common sources of internet click bait, often using misleading information to attract interest from casual browsing.

Statistics

UK banks have set up multibillion-pound provisions to compensate customers who were mis-sold PPI; Lloyds Banking Group have set aside £3.6bn,[17] HSBC have provisions of £745m,[18] and RBS estimated they would compensate £5.3bn.[19] PPI has become the most complained about financial product ever.[20]

Credit life insurance in the United States

Credit life insurance is a type of credit insurance sold by a lender to pay off an outstanding loan balance if the borrower dies.[21] Once the loan is paid off with the credit life insurance, there would be no claim on the borrower's estate. Credit life insurance is charged upfront, rather than spread over the life of the loan. A common example of a loan that can include credit insurance is an installment loan.

Credit life insurance may either be a permanent life insurance or a term life insurance; or an individual life insurance or a group term life insurance. Creditor would usually offer insurance products provided by its accredited insurers. Borrower would usually choose from among those that is most suitable to the term and amount of loan.

The sale of credit life insurance has been controversial in many cases.[22] For example, consumers are sometimes led to believe credit life insurance is required when added to loan contracts. When a lender sells more credit life insurance than is required to pay off the loan, the cost of the premiums is inflated along with the amount of the loan, which increases the amount of interest charged and the amount the consumer has to repay.

Terms and conditions for loan APR and fees vary from state to state and some are comparatively vague. For states that do not cap interest rates for installment loan balances, there are often unconscionable provisions in place.

For lenders, credit life insurance loss ratios typically reach 44%, meaning 44% of premiums paid on the credit life insurance product are paid back in claims, compared to non-credit insurance product loss ratios of at least 70%. While many states cap interest and loan fees, lenders use products such as credit life insurance to increase profit and the overall cost of loans.

States where the sale of credit insurance is authorized were found to include at least one type of insurance included with loan contracts in 80% of cases. On average, the contracts analyzed included 2.67 insurance and other ancillary products.[23] Consumers who refinance loan can be adversely affected by credit insurance because most of the money that consumers typically pay before refinancing is applies to fees and interest.[24]

The Federal Trade Commission has issued a consumer alert concerning various types of credit insurance, including credit life insurance.[25] The FTC consumer alert includes credit insurance shopping tips for consumers seeking a loan.

Advocates for credit insurance products argue consumers that are not insurable could benefit from a product such as credit life insurance rather than standard life insurance as no medical exam is required in the former scenario.[26] In the 9 states that have community property laws in place, the surviving party could be responsible for the debtholder's repayment without life insurance or credit life insurance in place.[27]

See also

References
  1. "What is payment protection insurance?". Retrieved 17 February 2014.
  2. "Do you need short-term income protection insurance (STIP)?". Money Advice Service. Retrieved 11 May 2020.
  3. Gerard Soong (22 January 1989). "Protection Against Losses Due To Debts". New Straits Times. Retrieved 17 February 2014.
  4. "Mortgage Payments in Phoenix". 17 February 2022. Retrieved 20 July 2022.
  5. "Annual review 2009/2010 – what the complaints were about". Financial Ombudsman Service. Retrieved 6 September 2010.
  6. Peston, Robert (9 May 2011). "Banking industry gives up on PPI mis-selling battle". BBC News. Retrieved 24 October 2013.
  7. Maundrell, Hannah (June 2008). "Do You Really Need PPI?". money.co.uk.
  8. Upton, Martin (4 April 2006). "Over-sold, over-priced?". OpenLearn. Open University.
  9. "How to claim for mis-sold PPI". fsa.gov.uk. Retrieved 17 February 2014.
  10. "Payment Protection Insurance Market Investigation Order" (PDF). Competition Commission (United Kingdom). 2011. Archived from the original (PDF) on 19 January 2012. Retrieved 13 June 2011.
  11. "Fearful regulators must climb to penthouse floor – Independent.ie". Retrieved 2 March 2018.
  12. "Law firm slams Central Bank's 'reckless' advice on PPI claims". breakingnews.ie. 8 October 2012.
  13. Tutton, Peter; Hopwood Road, Francesca (13 September 2005). "Protection racket". Citizens Advice Bureau. Retrieved 24 October 2013.
  14. "Loan calculator". Money Advice Service. Retrieved 24 October 2013.
  15. Office of Fair Trading (8 December 2005). "Response to the super-complaint on payment protection insurance made by Citizens Advice" (PDF). Archived from the original on 2 April 2014.{{cite web}}: CS1 maint: bot: original URL status unknown (link)
  16. "Monthly PPI refunds and compensation". FCA. 4 August 2017. Retrieved 4 January 2018.
  17. Peston, Robert (1 May 2012). "Lloyds makes extra £375m provision for PPI compensation". BBC News.
  18. Wilson, Harry (8 May 2012). "HSBC's provisions for PPI compensation rises to £745m". The Daily Telegraph.
  19. "RBS faces up to £900m in new PPI charges". BBC News. 4 September 2019. Retrieved 17 March 2021.
  20. McGagh, Molly (22 May 2012). "PPI becomes most complained about product ever". Citywire Money.
  21. Kagan, Julia. "Credit Life Insurance". Investopedia.
  22. "Installment Loans: Will States Protect Borrowers from a New Wave of Predatory Lending?" (PDF). National Consumer Law Center.
  23. "State Laws Put Installment Loan Borrowers at Risk: How outdated policies discourage safer lending" (PDF). The Pew Charitable Trusts.
  24. Kiel, Paul (13 May 2013). "The 182 Percent Loan: How Installment Lenders Put Borrowers in a World of Hurt". ProPublica.
  25. "Credit Insurance". Consumer Information. 1 November 2002.
  26. Estrin, Michael. "5 things to know before buying credit life". Bankrate.
  27. Lake, Rebecca. "Is Credit Life Insurance Worth It?". Retrieved 24 July 2019.
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