Unemployment Insurance To Get Cheaper!

We review a wonderful report that proposes dramatic changes to the sale of accident, sickness and unemployment insurance, and consider whether you should buy now. A dreadful rip-off is probably coming to an end.

Payment protection insurance (PPI) is also sometimes known as accident, sickness and unemployment insurance (ASU). It protects your payments to a loan, credit card or mortgage if something goes wrong and your income stops.

We've written many times about how over-priced this insurance is when you buy it from the lender at the same time as the loan, rather than from a stand-alone provider. We've explained how the policies are rife with exclusions, which is why the high price isn't worth it.

In particular, Fool writer Cliff D'Arcy has campaigned tirelessly on this for five years, and has hugely increased the profile of this rip-off.

But this year we've continued to get encouraging reports of PPI investigations and penalty fines for insurers. And today the Competition Commission has released an excellent report with extraordinarily decisive proposals for changes.

In this article, I'll tell you:

• The main points of the Competition Commission's proposals.
• What the proposals mean for us.
• About the shell-shocked response from insurers.
• Whether you should get a loan or PPI now, and what the alternatives are to PPI.

The Competition Commission's proposals

There's lots of great stuff for the customer in the CC's proposals, but the best bits are:

- The lender (be it a credit-card provider, mortgage provider or personal-loan provider) must state clearly the cost of the PPI in a quote, rather than burying the cost as they have done previously.

- Lenders are prohibited from selling PPI within 14 days of selling credit (i.e. a loan, credit card or mortgage) to the customer. The lender can provide a PPI quote at the same time as selling credit, but must still wait 14 days to make a sale.

- If the lender doesn't provide a PPI quote at the same time as selling credit, the 14-day period starts from when it does provide a quote.

- The lender cannot contact the customer again for 14 days, although the customer could call the lender after 24 hours to purchase PPI.

- Single-premium PPI policies will be banned. With those policies, rather than paying for the insurance on a monthly basis, the whole policy is added up front to your loan, and interest charged on it. Till recently, you would have found it hard to get a refund on these if you paid off your loan early.

- Mortgage and personal-loan providers will have to advertise PPI alongside their credit products, rather than burying the insurance within the loan.

- All PPI providers must include the same information and messages in their adverts, including the price of their PPI. The price must be written in a common format of monthly cost per £100 of benefit, e.g. £6 per £100. This means if when you claim it pays your £500pm mortgage, you know that it's £6 x 5 = £30 per month for the insurance.

- Adverts must state that PPI is optional and available from other providers.

- Providers must send annual statements to PPI customers including similar information to that found in the original quote.

What these proposals would mean for us if implemented

The proposed changes would give the customer time to compare prices with other PPI providers, and it encourages competition. It makes the total cost of both the loan and the insurance a lot clearer to people, and the fact that it's optional will be made obvious.

It'll eliminate virtually all the pressure tactics that many lenders have used to make millions of people buy insurance of questionable value to them. Annual statements will encourage people to review their policies and make it easier to decide whether to switch.

We should see the average price of this insurance decline dramatically. This is quite astounding, since the chances of people claiming on the redundancy part of the insurance has risen dramatically with the recession. The cheapest, stand-alone policies - which are already fairly priced - will continue to rise, sadly. But on the whole we will all be getting much better deals.

On the down side, loans will get more expensive to protect lenders' profits. Fool Jester and Head of Personal Finance, David Kuo, has done some calculations. He explained them in his usual way - through the use of cake metaphors - but to summarise the important bit: the effective costs of a loan with PPI versus one without can easily be 17.8% APR vs 7.9% APR. Such a reduction in return will not be tolerated by lenders. To compensate, they will increase the APR on loans.

All things considered, we will probably pay a bit less on average when we buy both credit and PPI, but more importantly we'll understand better the full cost before we decide to buy. When PPI was buried in the loan, most customers had no idea just much extra they were paying. As David shows, the loan is advertised at, say, 7.9%, but effectively you could easily be paying 17.8%.

What's more, the changes could encourage providers to compete more not just on price but also by improving terms and conditions, and PPI could do with big improvements to its T&Cs!

Only the smartest Fools who have benefitted from the cheapest loans and who already shop around for the very cheapest stand-alone PPI will lose out, but the vast majority of people who take out credit and PPI in future will see an overall benefit and a reduction in costs.

What the insurers say about the proposals

The insurers have till 4 December to respond, and the Competition Commission intends to publish its final report and recommendations in mid-January.

However, the Association of British Insurers - which exists to represent the interests of insurers - has already publicly released its initial response. Clearly it's in total shock. It ludicrously calls the Commission's proposals a PPI `ban' and says it'll be `devastating for consumers'. Well, it would say that, wouldn't it? Their response is total and utter self-serving drivel.

Should you buy a loan or PPI now?

If you're toying with buying this insurance, you should consider it sooner rather than later. Although the average price will fall dramatically, the cheapest stand-alone policies will rise in price.

You should buy PPI only after scrutinising the small print carefully and ensuring it's still useful to you, despite the many exclusions.

An alternative to consider is income protection insurance, which protects your income just if you fall ill, and not if you're made redundant, but the terms are still much better. But, even so, read the small print! There are always exclusions.

As for loans, the prices will go up markedly if the Competition Commission forces through its proposals, so if you need a personal loan you'll have to consider getting one sooner rather than later. I expect credit cards and mortgages also to be affected, although perhaps less obviously.

I hope that the Competition Commission's sensible proposals are carried out. It's only dramatic changes like this that will stop people being stuffed by one of the easiest stitch-ups financial companies have been able to get away with.

> Read David Kuo's full response to the news.

> Read this to find out how much the cheapest PPI costs these days.

> Use The Fool's personal-loans search engine to compare the market. We already help you to compare by breaking down the cost of each lenders' loans depending on whether you want PPI.