This Massive Rip-off Needs Killing Off!

Would you pay twelve times as much for insurance as you need to? No? Alas, every year, millions of people do!

Since I first started writing for The Motley Fool in January 2003, I've criticised rip-off payment protection insurance (PPI) over five hundred times. (Payment protection insurance meets the repayments on a credit card, loan or mortgage if you are unable to work due to accident, sickness or unemployment, and pays off your debt if you die.)

You may be wondering why I criticise this particular insurance cover at every available opportunity. The simple answer is that I worked in the PPI industry for more than a decade, so I'm on a mission to make up for my past sins and wicked ways!

There are dozens of reasons why you shouldn't buy PPI from lenders: for example, these policies are poorly designed, difficult to claim against, and are sold using dodgy, underhand sales techniques. However, the main reason why you should "Just Say No" to PPI sold by banks, building societies, credit-card issuers and mortgage lenders is that PPI is massively overpriced, so as to pay fat commissions to the lenders who sell it.

Indeed, here's some new research which makes this clear for all to see. The following tables show the huge variation in the cost of PPI for personal loans and mortgages and for stand-alone PPI (which isn't linked to a particular credit agreement and is sometimes loosely referred to as income protection):

The cost of payment protection insurance for personal loans

Source: Moneyfacts

As you can see, customers who buy loan PPI from Direct Line, NatWest and Royal Bank of Scotland are paying around £25 a month to protect a monthly repayment of £100, which is twelve times as much as the premium charged by Best Buy provider British Insurance. In other words, unless these borrowers are off work for more than three months of every year, then they are guaranteed to lose money by buying these swindling policies. Ouch!

The cost of mortgage payment protection insurance (MPPI)

Source: Defaqto

Although buying MPPI from lenders is still a bad move, at least the overcharging isn't so scandalous in this category. However, some lenders, notably Nationwide BS and Cheltenham & Gloucester, are charging four times as much for MPPI as table-topping provider British Insurance does.

The cost of stand-alone payment protection insurance

Source: Moneysupermarket

Although most independent providers of PPI charge reasonable premiums and actively compete on price (something which lenders singularly fail to do!), there remains some overcharging in this area. For instance, the most expensive stand-alone PPI policy costs five times as much as British Insurance's Best Buy stand-alone policy.

Hence, when you're shopping around for credit cards, personal loans or mortgages, be sure to price-check payment protection insurance at the same time. Otherwise, if you only compare interest rates and don't check the cost of PPI, you'll become yet another victim of daylight robbery.

So, don't be bullied or sweet-talked into buying hugely expensive PPI from lenders. Instead, get quotes from Best Buy providers such as Best Insurance, British Insurance and Burgesses (which are all part of the same group), Helpupay, Paymentcare, mortgageprotect and the Post Office.

More: Find low-cost credit cards, personal loans, mortgages and insurance today!