It's Time To Buy PPI

The PPI world is changing. It could even be a good time to buy a policy...

In an interim report, the Financial Services Authority (FSA) has just come down hard on lenders for their bad sales practices. It's not sales of the loans, credit cards or mortgages that concerns the FSA. Rather it is sale of an insurance policy that protects repayments if you have an accident, illness or are made redundant. This insurance is generically called Payment Protection Insurance (PPI).

The FSA says that many firms don't explain the key exclusions and limitations of these policies, which is vital if you're to be able to ascertain whether you should buy it. The firms also don't explain the costs properly or that interest will be added, as is often the case.

The FSA will report for a third time next year, but it has already stated that it will escalate its intervention.

What's more, and even better, the Competition Commission has just announced that it will force huge price cuts and recommend that lenders are not allowed to sell insurance at the same time as loans. Lenders would have to give borrowers a chance to shop around for insurance first. Hurrah!

The FSA shows its teeth

Today, the FSA fined Alliance & Leicester (A&L) £7m for serious failings in its telephone sales of PPI.

The city watchdog found that, from January 2005 to December 2007,  A&L did not make it clear to customers that PPI was optional.

The regulator says the bank also trained staff to put pressure on customers when they queried the inclusion of PPI in their questions or challenged advisers' recommendations.

The record fine reflects the fact that the failings at A&L are the most serious the FSA has found to date. The FSA said "firms cannot rely on paperwork sent out later as an excuse for unclear or misleading statements given on the telephone".

A&L will write to all customers who took out PPI policies by telephone in conjunction with a loan between 14 January 2005 and 31 December 2007, prompting them to review their policy against product information sent to them. It will also review any relevant rejected complaints and has committed to pay redress where appropriate.

How much does PPI cost these days?

So that's the PPI news. However, I thought it'd be interesting to look at the cost of PPI now. If the economy continues to head downwards as we expect then there will be an increasing number of redundancies. We could expect, therefore, that the price of PPI will have risen recently.

I've had a quick look at the price of buying PPI direct through banks. I just looked at a few examples at random and I found that, in two years, the price has gone up by £3-5pm per £100 of cover. Just to explain what that means: if you make loan repayments of £300 per month and your PPI costs you £30pm, you could say that the PPI cover costs you £10 per month per £100 of loan repayments.

Therefore, with these £3-5 increases, you can expect to pay, typically, a total of £15 to £25 per £100 when buy the insurance though your lender.

How much does best-buy cover now cost?

Hopefully the Competition Commission will successfully reduce the price people pay for PPI when they buy it direct from their mortgage lender, loan provider or credit-card provider. However, this shouldn't directly affect us Fools. That's because none of us buy PPI direct with our lender, do we? We either don't buy PPI at all, or we buy it separately, from what's known as a `stand-alone' provider. Why? Because it's five or ten times cheaper!

Therefore, what's important to us is how much the price of this cheaper, independent cover has risen. Take a look at this article from the longest-serving anti-PPI crusader in Britain, Cliff D'Arcy: Ditch Your Rip-Off Protection Today! In it, you'll see how much PPI cost two years ago. Look in particular at SecurityFirst (provided by Fool partner British Insurance) and the Post Office in the first two tables, as these sell stand-alone policies. In the third and final table, you can see them again, along with some other stand-alone providers.

PPI for personal loans (often called Personal Loan Protection or PLP)

I can tell you that the cost of protecting your personal loans has gone up, even if you buy a non-rip-off policy. SecurityFirst has no doubt taken the increased risk of redundancy into account and has increased its premium from £2.15 to £3 per £100 of cover. (All prices in this article are based on a 30-year-old policyholder). However, this is still five to ten times cheaper than lenders charge!

The Post Office has kept its price on hold at £4.50 per £100. (At present it has an offer across all its PPI policies that gives you the first £100 free for 12 months.)

PPI for mortgages (often called Mortgage Payment Protection Insurance or MPPI)

Amazingly, SecurityFirst has kept its price at £2 per £100 since October 2006. The Post Office has kept its price at £4.50. This suggests that best-buy mortgage PPI might be a bargain at the moment, but perhaps these prices will go up soon.

PPI for income (this protects your income, but don't confuse it with Income Protection)

SecurityFirst has increased its price from £2.25 to £3.50 per £100. (Minimum cover is £200, so £7.) PayProtect's policy is up just 10p to £3.59. The Post Office, again, has kept it's premium at £4.50.

For your education: this is not an `income protection' policy as we know it! Don't get confused. Some insurances share names that are interchangeable. Here's more on what PPI is, and read this for more on income protection.

Is now a good time to buy?

Well, the answer's given away in the headline, really. Even with some best-buy policies increasing in price, I would say that now is the best time for many people to consider a stand-alone PPI policy. It's particularly suitable if you're fearful of redundancy. But don't forget that these policies have many exclusions and limitations. Read the small print thoroughly to ensure it's suitable, and strongly consider getting income protection insurance instead, or in addition.

Finally, if prices are dramatically forced down by the Competition Commission as we now expect, lenders will have to increase the interest rate they charge on loans, mortgages and credit cards to make up for the loss. This will probably still happen even if the Bank of England reduces rates over the next few months. Therefore, fixing your loan now might be a good idea if you're worried about even higher costs, but please remember the true cost of borrowing!

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