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What payment protection insurance does
Why is payment protection insurance important?
Things you may need to ask or think about when buying payment protection insurance
Payment Protection Insurance protects a borrower's ability to maintain repayments and helps them avoid getting into debt should they be unable to keep up their repayments due to accident, sickness (Disability) or unemployment.
Policies are available to protect most forms of personal credit, including mortgages, personal loans and credit card repayments. Cover is often purchased at the time the finance arrangement is made, but may be available at a later date or taken out as a stand-alone policy
The cover is very easy to purchase, as there are very few eligibility requirements. Typical requirements are that you are aged 18 to 65, or higher in some circumstances, and that you are employed for at least 16 hours a week or on a long term contract or have been self-employed for a period of time.
All policies will have a period at the start of each claim that you will need to wait before payments begin. Once a claim has been accepted, benefit payment periods will vary but typically, claims are paid for up to 12 months in most cases, but some may last as long as 24 months.
Payment protection is designed to help pay your financial commitments in the case of accident, sickness (Disability) and unemployment. These circumstances have been proven to cause financial hardship due to a reduction in income, making it difficult to maintain payments on mortgages, loans and credit cards. Here are just a few reasons why payment protection is important
The Prospect of redundancy during uncertain times
Savings are often insufficient
The level of State benefit has reduced for mortgages taken since October 1995. Borrowers now face a nine-month wait before benefit begins and even then there are additional restrictions and you may only receive limited assistance. Payment protection insurance provides a useful safety-net and could help you keep your home.
According to Government statistics, 755,000 people were made redundant in the UK between June 2002 and May 2003 - the equivalent of over 3,000 every working day. There were also, on average 1.5 million people claiming unemployment benefit during that time. A payment protection policy could have helped many through a financially difficult time.
Bank of England figures show that people are relying on credit more than ever before. At the end of July 2004, almost £1,000 billion was outstanding on mortgages, loans and credit cards. The Citizen's Advice Bureaux reported that the average household has debts of £10,700 (excluding mortgages) and confirmed that it dealt with well over one million new debt enquiries last year, suggesting that many are struggling to maintain payments.
According to the Institute of Fiscal Studies, around half of the UK population has £600 or less savings and around a quarter of the population are £200 or more in debt. In addition, nearly half of us do not save regularly and a third have no savings at all. This lack of saving could cause financial hardship in the event of accident, sickness (Disability) or unemployment.
Over 320,000 people were killed or injured on UK roads in 2000 *
Nearly 3 million people suffered injuries at home in 2000 that warranted a visit to A&E *
Over 47,000 employees suffered major injuries at work in 2001, with 736 resulting in death **
These accidents could leave people unable to work for long periods of time. Whilst some employers can help financially for a while, payment protection can help for at least a year.
* Royal Society of the Prevention of Accidents (Rospa)
** Health and Safety
When in good health, may people find it hard to envisage suffering from a major or critical illness but, if you are borrowing money, thinking about this now could save financial problems in the future. Statistics from Cancer Research UK and the British Heart Foundation show that:
Four out of ten people will be diagnosed with cancer at some stage during their lifetime *
Heart disease will kill one in four men and one in six women and remains the biggest killer in the UK **
Someone suffers a heart attack every four minutes **
* Cancer Research UK
** British Heart Foundation
Important exclusions
Consumers must not be aware of impending unmeployment at the time they buy cover. Policies usually do not cover unemployment occurring within an initial period of time following the purchase of the policy. This time period is usually in the region of 60 - 120 days.
Policies exclude claims arising from pre-existing medical conditions that you are aware of or should reasonably have been aware of when the policy was purchased. Medical conditions about which you had seen, or arranged to see, a doctor about during a specified period immediately before the start date of the policy may also be excluded.
Claims that result from your own actions as a result of drug or alcohol abuse will not be covered.
Is there anything I should ask or think about?
There is usually a waiting period at the start of each claim before benefits are paid which may be 30, 60 days or longer. Some policies may then pay benefits from that date or from day one of the claim. Payments are usually paid one month in arrears.
How long will the policy keep paying?
Policies will typically pay out for 12 or 24 months or longer or until you return to work, if sooner. Check your policy.
Can I take out a policy at any age?
Policies usually cover you from age 18 up to a specified age of say 60 or 65, but a higher age limit may be available. Ask your insurer.
I am self-employed with my own business. Can I claim if I have to cease trading?
Some policies will cover you if you have involuntarily ceased trading because you could not find enough work. Voluntary insolvency will not be covered. You must also have informed the Inland Revenue that you have ceased trading.
I am not a permanent employee. I am employed on a contract basis. Can I claim?
Some insurers will accept your claim if you have been on a contract for at least 12 months and had it renewed at least once or worked continuously for at least 24 months.
Can I claim if I had a medical condition before I bought the cover which then reoccurs?
Some insurers will accept your claim if you had been free of symptoms for a certain length of time prior to taking out the insurance. Some chronic conditions may not be accepted due to their recurrent nature.
Can I claim for pregnancy or childbirth?
Not unless there is a serious medical complication which is diagnosed by a recognized obstetric specialist.
I only took out the insurance because I knew it was likely that I was going to become unemployed. Can I still claim when this happens?
No. If you are aware at the start date of the policy of it being likely that you will become unemployed the insurer will not pay, whether you had official notice or not.
If I am unemployed and can only get short term temporary work, will I be able to resume claim payments when the temporary work ends, without having to start a new waiting period before the claim is paid?
Some insurers may suspend your claim whilst you are working and start again when the work ends without having to wait again. The insurer will then add up all the period of payment towards the maximum period for which benefits may be paid.
What happens if I am claiming for unemployment under the cover and I become sick and unavailable for work, will I have to go through another waiting period?
Not usually, many insurers allow you to switch without having to go through another waiting period.
When I buy the cover should it be explained to me?
Yes, when you buy the cover the seller should explain the important features and ensure it is adequate for your needs.
Policy terms and conditions can vary between insurers.
Always read your policy document carefully to ensure you understand what you are covered for.
If in doubt, check with your insurer.
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