Thursday, August 26, 2010

Payment protection insurance

Payment Protection Insurance, (also known as PPI, Credit Protection Insurance, Loan Repayment Insurance, not to be confused with Income Protection or Credit Card cover) is an insurance product that is designed to cover a debt that is currently outstanding. This debt is typically in the form of a loan or an overdraft, and is most widely sold by banks and other credit providers as an add-on to the loan or overdraft product. Though there are minor variations depending on the supplier of the insurance, it typically covers a person against an accident, sickness, unemployment or death, each of which are circumstances that may prevent them from earning a salary/wage by which they can service their debt. A few providers also include carer cover.

If the appropriate criteria are met, the insurance covers minimum repayments against the loan or overdraft for a finite period (typically 12 months). After this point the person must find other means to repay the debt, though the period covered by insurance is typically long enough for most people to start working again and therefore start earning a salary with which to service their debt. PPI is different from other types of insurance such as home insurance, in that it can be quite difficult to determine if it is right for a person or not. 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.

Insurance Principles

Insurance involves pooling funds from many insured entities (known as exposures) in order to pay for relatively uncommon but severely devastating losses which can occur to these entities. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring. In order to be insurable, the risk insured against must meet certain characteristics in order to be an insurable risk. Insurance is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses.