Payment protection insurance

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Payment protection insurance (PPI), also known as credit insurance, credit protection insurance, or loan repayment insurance, is an insurance product that enables consumers to ensure repayment of credit if the borrower dies, becomes ill, disabled, loses a job, or faces other circumstances that may prevent them from earning income to service the debt. It is not to be confused with income protection insurance, which is not specific to a debt but covers any income. PPI was widely sold by banks and other credit providers as an add-on to the loan or overdraft product.^[1]

PPI usually covers payments for a finite period, typically 12 months, in which case they might be marketed as short-term income protection insurance (STIP) policies.^[2] For loans or mortgages the benefit amount may be the entire monthly payment, but for credit cards it is typically the minimum monthly payment. After the end of the period the borrower must find other means to repay the debt, although some policies repay the debt in full if they are unable to return to work or are diagnosed with a critical illness. The period covered by insurance is typically long enough for most people to start working again and earn enough to service their debt.^[3] Careful assessment of what would happen if a person became unemployed would need to be considered, as payments in lieu of notice (for example) may render a claim ineligible despite the insured person being genuinely unemployed. In this case, the approach taken by PPI insurers is consistent with that taken by the Benefits Agency in respect of unemployment benefits.^[4]

Most PPI policies are not sought out by consumers. In some cases, consumers claim to be unaware that they even have the insurance. In sales connected to loans, products were often promoted by commission-based telesales departments. Fear of losing the loan was exploited, as the product was effectively cited as an element of underwriting. Any attention to suitability was likely to be minimal, if it existed at all.

In all types of insurance some claims are accepted and some are rejected. Notably, in the case of PPI, the number of rejected claims is high compared to other types of insurance. The rare customers who deliberately seek out the policy may have little recourse when they discover it is of no benefit.^[5]