A GUIDE TO LOAN PAYMENT PROTECTION INSURANCE

Most people who jest that they are prepared to "beg, steal or borrow" never intend to stoop lower than the act of borrowing. But the same cannot be said of many lenders, who are quite prepared to commit daylight robbery. In addition to charging punitive rates of interest, lenders often manage to extract an extra pound of flesh from their customers by automatically including an additional amount in their monthly loan repayment quotes to reflect the cost of a product called "loan payment protection insurance".

There is nothing wrong with this cover conceptually. Indeed it serves an extremely useful purpose, ensuring that you are able to meet your loan commitments if you lose your income.

But the problem is that most lenders offer outrageously poor value loan payment protection insurance policies and fail to explain that there is nothing to stop borrowers from shopping around for the loan payment protection elsewhere. Anyone who needs to borrow does not, by definition, have any money to waste. So the essential message to take on board is that specialist loan payment protection insurance providers can both undercut lenders by significant margins and provide a higher standard of cover.

Why Is loan payment protection insurance necessary?

Adopting the "buy now, pay later" mentality in the current era of easily available credit is all very well if you can guarantee that you will always have an income from which to make your loan repayments. But, unless you have substantial private means or enjoy the support of a wealthy benefactor, you are most unlikely to be able to boast such a degree of security.

The simple fact of the matter is that most of us who are below retirement age have to get out of bed in the morning to go to work just to cover our outgoings. So anyone who underestimates the potential repercussions of becoming seriously ill or being unexpectedly made redundant does so at their peril.

In many cases the mortgage payments and other essential outgoings such as food and utility bills will swallow up any available savings within a couple of months. So how are you going to meet other loan repayments? Taking out further loans in order to repay existing ones is certainly a slippery slope to get onto and it can ultimately lead to having your home repossessed and even to ending up in the bankruptcy courts.

False Sense of Security

Don’t kid yourself that these things only ever happen to other people. Its human nature to feel indispensable at work, but even the most conscientious and talented people can find themselves laid off in the current commercial environment. Remember also that every year in the UK hundreds of thousands of people suffer from serious health conditions like cancer and heart attacks.

It is also important to realise that our social security system does not provide anything like the support that is generally imagined.The Welfare State proved a heavy casualty to Thatcherism, and New Labour has shown little appetite for resuscitating it.

Exactly what State benefits you will receive if you are unable to work will depend on your individual circumstances, but you can rest assured that they will leave you hard pressed merely to survive.You may get assistance with housing costs and enough money to enable you to eat, but there is most unlikely to be anything left over to put towards loan repayments.

How Does Loan Payment Protection Insurance Work?

You choose the amount of loan payment protection insurance cover you require and this will normally be equal to your monthly loan repayment – many providers in fact do not allow it to exceed this and they also impose an upper cover limit, typically of £1,000 a month.

The loan payment protection insurance premiums will then be calculated using the same pro-rata flat rate payable by all policyholders, regardless of occupation, medical history, age or smoking habits.The better specialist loan payment protection insurance providers can charge as little as £4 a month per £100 of monthly cover, but lenders can charge 25% to 50% more.
Buying loan payment protection insurance from the right source can therefore save hundreds, or even thousands, of pounds over the lifetime of the loan.

Loan payment protection insurance cover can be arranged instantly, because there is no underwriting carried out at outset, and the policy will pay out the level of monthly benefit selected if you are unable to work as a result of accident, sickness or involuntary unemployment. But benefit is normally only payable for a maximum of one year.

Buying Loan Payment Protection Insurance From The Right Source

Most specialist loan payment protection insurance providers have a clear edge on quality of cover as well as on price. For example, loan payment protection insurance policies do not pay out until after an initial waiting period, but in the case of many lenders this period is 60 days whereas with the specialists it is normally only 30 days.

The specialists loan insurance are also normally more flexible. In particular, they will often allow you to take the incapacity (eg: sickness and accident) and involuntary unemployment components separately at a reduced price.This could, for example, be very useful for someone who has unusually generous sick pay cover at work but who is still
concerned about redundancy, and therefore only wants involuntary unemployment cover.

Important Restrictions And Exclusions

But whether involuntary unemployment cover is taken in isolation or as part of full-blown loan payment protection insurance, it is important to realise that it has limited value if you are self-employed.This is because it will only cover you if you actually cease trading, as opposed to merely experience a quiet patch.

Loan payment protection insurance also has a number of significant exclusions. It will not, for example, pay out:

• For "pre-existing medical conditions" – conditions which you had prior to starting your loan payment protection insurance policy
• Stress related complaints or back pain, unless a consultant actually certifies that they are serious enough to stop you from working
• If it becomes clear that you knew you were about to make a claim when you took out the policy
• If you are notified of involuntary unemployment within 60 days of the loan payment protection insurance policy start date
• If you leave work voluntarily – and this includes taking voluntary redundancy
• If you leave work as a result of misconduct, fraud or dishonesty
• If your work is of a casual, temporary and seasonal nature.

The Claims Process

Details of the claims process will be outlined in your loan payment protection insurance policy document.You will usually be required to complete a claim form and send it to your insurer, and those who have been made redundant will also need to enclose their redundancy notice in support of their claim.

If you are ill or injured, the insurer will establish the validity of your claim by writing to your GP, and it is at this stage that it will discover if you are trying to claim for a pre-existing condition – which is excluded.

Complaints

If you have a complaint, you should first raise this with the insurer, lender or specialist loan payment protection insurance provider intermediary you bought the policy from. But, if you are not satisfied with its complaints procedure, you may be entitled to refer the matter to the Financial Ombudsman Service - the independent body that resolves disputes between financial organisations and consumers. Using the service is free and will not jeopardise your rights to take subsequent action through the courts.

Do All Borrowers Need Loan Payment Protection Insurance?

Loan payment protection insurance will clearly represent better value to some people than it will to others. he self-employed, because they are not covered for involuntary unemployment unless they actually cease trading, may well feel that they cannot justify the premiums.The same applies to employed people in industries where workforces are commonly reduced by
voluntary redundancy - which is excluded.

Similarly, someone who has a recurring illness that would be excluded on the grounds of being a pre-existing condition may decide that the cover doesn’t represent good value.

Other potential loan payment protection insurance policyholders may simply be put off by the cover’s one year pay-out maximum and by the fact that it has so many exclusions. But the majority of healthy employed people who are taking out loans over and above their mortgages are likely to conclude that they simply cannot afford to be without it.