ConsumerValue: Insurance
7. Payment protection insurance
What is payment protection insurance?
Payment protection policies are designed to cover your repayments on a loan if you lose your income due to an accident, illness, death or redundancy.
Do I have to take out a payment protection policy when I take out a loan?
Many lenders offer this sort of policy when you apply for a personal loan. But don't think that you have to take this cover.
In fact, payment protection insurance may not be suitable or offered to you if you are self-employed or a temporary/contract worker. So make sure you are eligible to get it in the first place and decide if you really need the cover.
If you feel that you would have alternative means to repay the loan in the event of losing your usual source of income, then payment protection may be neither necessary nor cost effective for you. It is your choice.
What questions should I ask myself before taking out payment protection insurance?
You should ask yourself:
- Do I really need this cover?
- What is the full cost over the term of the loan?
- Am I already in a sick-pay scheme?
- What are my chances of being made redundant?
- If the worst happens would the policy save me from major financial distress or just from minor discomfort?
- Would I be better off with alternative cover such as life insurance, income protection, personal accident insurance or serious illness cover?
- Am I entitled to accident or illness cover through my job, sports club or other professional association?
If you decide to take out payment protection, make sure you check:
- The total cost of insurance over the term - while the monthly payment might seem cheap, it can add up over the term of a loan. For example, for a five-year €10,000 loan, payment protection could cost up to €2,000.
- The policy conditions to see what is covered and what is excluded - if you suffer an illness that is not covered, for example, the policy would not pay anything in the event of a claim. Some policies do not include redundancy cover while others do.
- If you have to pay the insurance up-front. Some lenders add the full cost of the insurance onto your original loan. This costs you more because you pay interest not only on the loan, but also on the premium.
- What benefit would you receive? Many policies only cover a maximum of one year's repayments and only offer a certain period of time. Payment protection insurance on credit cards usually only covers the minimum repayment for a set period of time. You may consider that these benefits are not worth the cost of payment protection insurance.