PPI has a terrible reputation these days, so what can you do to protect your income if disaster strikes?
PPI (payment protection insurance) rightly has a very poor reputation these days. Most policies were right royal rip-offs and I’m delighted that millions of people can now claim compensation.
That said, the basic idea behind PPI wasn’t completely stupid. If you’re made redundant or can’t work due to sickness, you’re probably going to struggle to pay your bills. Especially your mortgage and any other loans you may have. Taking out insurance to cover you in that situation makes sense.
So are there any policies out there that provide cover but don’t rip you off? Are there any better alternatives to PPI?
Well, I’ve found three alternatives that I’m happy to highlight:
1. Nationwide Lifestyle Protector
Last year Nationwide launched a new insurance product called Lifestyle Protector. It’s really a PPI product with a lot of the bad stuff taken out.
In other words:
- the pricing looks reasonable
and
- the policy isn’t sold on a ‘single premium’ basis. (Many PPI customers paid for their insurance in one lump sum when the policy was taken out. That lump sum was then added to the loan, which meant the lender could make yet more money.)
With Lifestyle Protector, you can insure yourself against accident and sickness, or unemployment, or both. Crucially the coverage will apply to back pain or mental health issues. This is a really important point as many PPI policies in the past wouldn’t pay out if the claimant was affected by either condition.
Customers can choose whether the insurance will start soon after the problem starts or whether there’s a longer waiting period – up to 180 days. Once the waiting period is over, the policy will normally pay out for 12 months.
Pre-existing conditions can’t be covered during the first 12 months you have the policy, but that can change once you’ve been insured for a year and you renew .
Prices will vary dramatically from person to person, but Nationwide does give some prices just as a guideline:
Typical monthly premiums for £100 cover
|
Age |
Monthly premium |
|
25 |
£3.33 |
|
35 |
£3.76 |
|
45 |
£4.91 |
These figures are for a non-smoker buying cover for accident, sickness and unemployment and paid for 12 months with a 30-day waiting period. The policy will pay out £100 a month for a successful claim.
So if you’re 25, and you wanted to ensure you’d get a payout of £500 a month, you’d be charged something like £198 a year. That doesn’t seem too high a price to pay for some peace of mind.
2. Income Protection Insurance (IPI)
The second alternative is Income Protection Insurance (IPI). This is a generic type of insurance, not a product from one provider.
I think IPI is a fantastic idea for many people, perhaps the best insurance of them all.
If you become ill, it will cover you until you’re fit to work again or you reach retirement age. You’ll receive a monthly payment until you can go back to work.
So if a 30-year old with an IPI policy becomes ill and can’t work for the rest of her life, she should then be covered until she is 60 or 65. With Lifestyle Protector, she’d only be covered for a year.
IPI policies are also fully underwritten. This means that if you already have some health problems, you can still get insurance.
So if you have high blood pressure, you could still take out a new policy now, and you would receive payouts if you had a heart attack in 2015. Obviously, previous health problems will push up the size of your premium, but at least you get the reassurance of coverage.
With Nationwide, you won’t get any coverage on pre-existing conditions, although you may be offered such coverage if you renew after a year.
[SPOTLIGHT]What’s more, many IPI policies are ‘guaranteed’ which means that you’ll be charged the same premium throughout the life of the policy. The insurer can’t cancel the policy just because it thinks you’ve become too big a risk.
On the downside, the vast majority of IPI policies only cover you for accidents and illness, not unemployment. Nationwide Lifestyle Protector does pay out if you lose your job.
3. Short term income protection (STIP)
Short-term income protection (STIP) is similar to IPI but you’re only covered for a shorter period – usually between one and five years.
I’ve sometimes seen the terms STIP and PPI used interchangeably as though they’re the same thing. But I think there’s a difference. A PPI policy isn’t individually underwritten so you won’t get coverage for pre-existing conditions – not initially anyway.
A true STIP policy gives you most of the advantages of a full IPI policy except coverage doesn't last until you reach retirement age. That could be a problem if you become seriously ill and can’t work for 20 years.
Costs and price
So, for me, it’s obvious that a full IPI policy is the best approach. Trouble is, it’s also the most expensive. My research suggests that IPI is typically twice as expensive as STIP. Nationwide’s Lifestyle Protector is roughly the same price as STIP.
However, I’d stress that these are just ballpark figures and they will vary from individual to individual and your circumstances.
You can reduce the cost of IPI by purchasing a policy with a long waiting period. This option can make sense if you have a fair amount of money in a savings account.
I’d also stress that you shouldn’t focus just on price when you choose your insurance. The cheapest insurance may have lots of exclusions and not pay out when you need it.
That’s why you should always carefully read all the terms and conditions of a policy before you buy it. It’s also probably worth speaking to an Independent Financial Advisor (IFA) before you buy.
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