Many people are concerned about job security, accident and sickness, and protecting debt repayments. We compare the two main ways to get peace of mind.
We're all concerned about loss of income through accident, sickness and unemployment. We're concerned that we won't be able to pay debts during this time. And we certainly pay a high price for this concern through insurance premiums. Without any further ado, I'll compare the more generic income protection insurance (IP), which you get through life insurers, with the debt-specific payment protection insurance (PPI), which you normally get through your loan, mortgage or credit card provider.
Income protection insurance (IP)
Also called, amongst other things, permanent health insurance (PHI) and income replacement insurance, this is designed to pay you benefits when you're out of work, regardless of the reason.
Payment protection insurance (PPI)
This cover comes under all sorts of guises, such as personal loan protection (PLP), mortgage payment protection insurance (MPPI) and credit card repayment protection (CCRP). It's to protect debt payments during periods of accident, sickness or unemployment.
IP vs. PPI:the costs and key benefits
I just got a couple of online quotes. Through The Fool's life insurance comparison tool, I put in details for a 26-year-old, non-smoking marketing manager earning £40,000 per year. I requested income protection benefits of £1,666 per month whenever Mr. X is unable to work, up until he's 60. I selected an excess period - the length of time he's off work before he starts receiving the £1,666 - of thirteen weeks.
I then got a quote to protect my mortgage payments through Paymentcare, one of the cheaper providers of PPI. Guessing that my 26-year-old had an average mortgage of £88,000, I used a figure of £500 per month as the mortgage repayment. The excess period they offered was one month and Mr. X can claim benefits for 12 months. Let's see how the policies compared:
IP through The Fool | PPI through Paymentcare | |
|---|---|---|
Cost: | £19.34 per month (fixed) | £19.75 per month (fixed) |
Excess period: | 13 weeks | 1 month |
How long are | Till 60-years-old | 12 months |
What is the benefit? | £1,666 per month into a | £500 mortgage repaid |
Benefit paid after | £1,666 | £1,000 |
Benefit paid after | £14,994 | £5,500 |
Benefit paid after | £34,986 | £5,500 |
So, for about the same price, this marketing manager gets more than three times the monthly cover with IP than PPI, plus it's paid for longer: until he's 60 if necessary. He has to wait 13 weeks for the IP cover to kick in, compared with just one month for the PPI. However, after 13 weeks he'll be paid £1,666 with IP, whereas he'd have only been paid £1000 in that time by the PPI provider.
IP vs. PPI:the small print
I've been reading through the small print of various PPI and IP contracts. Apart from the brain haemorrhage, I also got from this exercise that you can't be too careful when taking out either sort of policy. Both IP and PPI contracts can contain seemingly small variations in wording, which could make the difference between being able to claim and getting nothing.
Conclusion
The Fool has bad-mouthed PPI for a very long time, and the OFT has recently got in on the act too. I only got the one quote for PPI in my example, but, let's face it, the comparison doesn't bode well. Generally we find that PPI has more onerous exclusions, although you could be caught out with either type of policy.
When you're taking out a loan, credit card or mortgage, consider using IP to protect it, instead of PPI. If you feel PPI is more suitable, don't buy it through the lender. Get it from a cheaper 'stand-alone' provider, such as: paymentcare, Helpupay, Best Insurance, British Insurance, Burgesses, mortgageprotect and the Post Office.
>Compare income protection insurance through The Fool.
> For more guidance on who protection is suitable for, and to get some tips on reading the insurance small print, see our Income Protection Insurance Guide.