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With the spectre of redundancy looming for thousands of people, insurance to cover credit commitments has been brought into sharp focus. However, there is no shortage of options and many come with a bad reputation. Two weeks ago, controversial payment protection insurance (PPI) hit the headlines after the Competition Commission recommended that it no longer be sold alongside a credit product, such as a card or a loan.
Such insurance is designed to protect those who, through sickness or redundancy, would struggle to meet their credit repayments, but it is notorious for having been sold to thousands for whom it is not appropriate, and for coming with a long list of exclusions that enable insurers to reject claims.
If you fear for your job, however, you should still consider some form of insurance to meet your liabilities should the worst happen.
You will come across a variety of confusing names, including 'accident, sickness and unemployment' cover (ASU), 'mortgage payment protection insurance' (MPPI) and 'income protection cover', as well as PPI. All offer similar protection in the event of you being unable to work through redundancy or ill health, but the main things you need to consider are: do you want to cover yourself only if you can't work because of redundancy, or do you also want to include sickness cover? And do you want to cover only your credit commitments - such as a mortgage - or a percentage of your lost income too?
Where to buy
You will usually be offered PPI when you take out a credit card or loan, or MPPI when you take out a mortgage. However, these policies are typically riddled with exclusions. Big names in the payment protection insurance sector, including Alliance & Leicester, GE Capital, HFC Bank and Liverpool Victoria, have all been fined for mis-selling in the recent past.
'People need to look very carefully at what they are buying,' says Adam Williams from consumer body Which? 'Often you are not covered if you are self-employed or over 65, for example, but you may not be told this.'
Rather than buying at the point of sale, it is worth looking at the credit provider's small print and comparing it with standalone policies offered by independents. Companies such as British Insurance, Paymentcare, the Post Office and others in the table above all provide policies that might better suit your needs.
What you are signing up for
PPI and MPPI, whether bought alongside a credit product or alone, covers only your mortgage or loan repayments; it does not make provision for your extra monthly outgoings. ASU, on the other hand, will also cover a percentage of your income for up to 12 months after you lose your job or cannot work because of an accident or illness. It is typically priced per £100 of monthly income insured and expect to pay between £2 and £6 per £100 covered.
When considering ASU you need to check if you are covered by your employer in the event of being off work through illness or accident. If so, you may want to consider unemployment-only cover. The cost of standalone unemployment insurance is typically 80 per cent of what you would pay for the same ASU policy.
What to watch out for
If you are self-employed, over 65 or have been with your employer for less than six months, check if the policies you're looking at will cover you at all. Many won't. If you sign up to an ASU policy, be aware which illnesses are actually covered. 'Two of the most common forms of workplace illness - back pain and stress - are usually excluded from cover,' says Williams.
An ASU policy will typically cover between 50 and 75 per cent of your monthly income, and payouts will last for a year.
You will also need to wait a number of months after you have bought the policy before you can make a claim. This is done to stop people who know they are about to lose their job insuring themselves. The waiting time is typically between three and four months from the date the policy starts. Once you make a claim, there will also typically be an 'excess period' of around 30 days before the policy starts paying out. Some offer 'back to day one' cover, meaning that when your policy does kick in, it will backdate payment to the day you had to stop working.
Is unemployment cover a waste of time?
The short answer is no, not in all cases, although you do have to be very careful about what you sign up for. Even the better policies come with exclusions, including limits on how much of your income and debts you can cover and a hefty wait between taking the policy out and making a claim. As more people get made redundant, and because the monthly premiums can be relatively low, the policies are worth considering but only as part of a review of all your finances. For example, the policy is going to offer a much better safety net if you also look at boosting your savings in the next few months to make up for any shortfall in the policy payout.
Is there an alternative?
A much more comprehensive alternative to a PPI/ASU policy is to take out a permanent health insurance (PHI) policy and add unemployment cover to it. It pays a regular income designed to protect your standard of living if you suffer long-term sickness or injury. Benefits usually start after an initial waiting period of four, 13, 26 or 52 weeks and it is payable until you return to work, die or the policy term expires - whichever happens first.
'PHI is far superior to ASU and providers who refer to ASU as "income protection" are possibly trying to mislead consumers into thinking they are buying something else,' says Matt Morris of insurance broker LifeSearch.
Unlike ASU, PHI premiums are assessed on age and health. That makes it a much cheaper option for someone who is young and fit. Some insurers will only offer unemployment insurance alongside their own PHI policy; others will offer it alongside a policy from another insurer. The unemployment insurance, however, will come with the same exclusions described above.
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