Don't Be Conned Into Buying This!

Homeowners need to watch out for this rip-off insurance - especially anyone worried about meeting their mortgage payments!

If you're a regular Fool reader you'll know my colleague, Cliff D'Arcy, has crusaded against rip-off Payment Protection Insurance (PPI) for over five years now.

But if you're new to PPI, here's a quick re-cap:

What is PPI?

PPI is an insurance policy which is usually sold to borrowers alongside mortgages, credit cards, store cards, personal loans and other credit agreements. If you're no longer able to work due to accident, sickness, or unemployment, a PPI policy will cover the monthly repayments on your debt. Benefits under a PPI policy usually last for a year.  

That might sound great in theory, but in practice PPI is grossly over-priced and over-sold. Lenders have the perfect opportunity to sell PPI to us at the point of sale -- and, believe me, they will be really keen to sign you up. But because you will normally only be offered one PPI product, lack of choice makes the PPI market almost anti-competitive.

Worse still, high street lenders have been accused of selling PPI policies with premiums that are many times higher than those offered by the few independent PPI insurers. And with little competition, they can pretty much charge what they like.

There's no question, PPI policies are complex and riddled with exclusions. Even the small print can be extremely difficult to decipher, which leads to claims being frequently rejected. In fact, the Office of Fair Trading's Payment Protection Insurance report, October 2006 (covering statistics for 2005) revealed that for every £1 taken in premiums to pay for PPI, only 19p is paid back to customers in claims.

This means massive profits for lenders who sell PPI. And although the Competition Commission is currently mulling over how to right the wrongs of the PPI market, the sale of these rip-off policies continue.

MPPI is still going strong

What's even more worrying is the take-up of Mortgage Payment Protection Insurance (MPPI) actually seems to be rising. And that's despite all the bad publicity, not to mention the extraordinarily poor value for money.

So why are people still buying MPPI? As the threat of recession looms, homeowners are growing increasingly concerned over job safety. If redundancies are on the cards, the risk of falling behind with mortgage repayments becomes more palpable.

And, of course, while selling your home to avoid falling into arrears is a terrible option at the best of times, it's even worse when house prices are falling. This prospect is particularly distressing for homeowners who have bought properties recently, because they could find selling up in a falling market doesn't even cover their outstanding mortgage debt.

So it's easy to understand why more people are turning to MPPI to safeguard against these risks. But remember two things: Firstly, these policies are very costly and, secondly, they only provide limited cover. True, MPPI may pay your mortgage for a year if you can't, but what about other expenses such as household bills and non-mortgage debts. It won't cover those.

In my opinion, there may be better ways to protect yourself:

• First of all, ask yourself do you really need MPPI? If you're made redundant, will your employer provide a decent redundancy package? If you become unwell, will you receive more generous benefits than statutory sick pay?
• Do you have a savings cushion you could fall back on or perhaps a partner with a high enough income to support you until you can work again? This would allow you to avoid expensive MPPI.
• Is your mortgage flexible? If you're facing difficulty meeting your repayments, you may be able to take a temporary payment holiday or underpay for a while until you get back on your feet, rather than overpaying for insurance that doesn't really provide the protection you need.
• You could consider Critical Illness Cover (CIC) or Income Protection Insurance (IPI) instead of MPPI. These policies pay out benefits in the event of illness or accident. CIC pays a lump sum if you are diagnosed with one of the specified conditions covered under the plan. Meanwhile, IPI is designed to replace a proportion of your income until you're ready to return to work. But watch out for any exclusions that might apply which could affect a claim, and don't forget that neither provide cover in the event of unemployment.
• If you're still not convinced you can live without MPPI, go to an independent insurer rather than taking the policy offered by your mortgage lender. This should be much better value. You could try Fool Partner British Insurance for a best-buy policy.

There's no doubt PPI -- and MPPI -- are over-priced and should be avoided like the plague. I think this short excerpt from one of Cliff's many PPI articles: "Fool Fights Rip-Off Insurance", written in February 2007, really sums it up:

"All in all, I'd rate PPI as the worst-value financial product ever created."

Enough said.

More: The Death Of Rip-Off Insurance? | Avoid This Enormous Rip-Off