Basically insurance is a risk management policy which allows an individual or an organization to transfer risk to an insurance company in exchange of pre-determined payments known as premiums. Insurance is a contract. For an insurance to be viable, it must adhere to all the principals of a contract including agreement between parties involved,consideration and capacity to contact. In the case of an insurance contract, the parties involved are the insurer and the insured. The consideration is the premium and the risk involved and the capacity to contract is the insurable interest in the subject mater to be insured.
A payment protection Insurance, commonly known as PPI or credit insurance is an insurance contract which allows the insured, usually a creditor, to insure loan repayment in case the borrower dies or defaults payment due to factors such as job loss, illness or other circumstances which can prevent him or her from earning an income to service the loan. PPI is different from income protection insurance which is not specific to any debt but covers any kind of legal income. Usually, PPI is sold by banks or private credit providers as an additional to overdrafts or loans. Credit insurance can be used to insure all types of borrowing such as consumer loans, car loans finance company loans and mortgage loans. Credit cards can also be included in PPI covers since in a way they are a form of loans.
Risks Which Can be covered in a credit insurance.
Credit insurance has different policies to cover different types of credit risks these include;
I) Credit life insurance-This kind of policy dictates the in insurance provider to pay the insured in case the borrower defaults payment due to death.
ii) Credit disability insurance- The insurer pays the loan in case the debtor defaults due to disability caused by accidents ,terminal illness etc.
iii)Credit accident insurance- In any case the borrower gets an accident and is not able to service his loan, the insure has to pay it.
Although the policy is bought by the borrower who pays the premiums as he continues to service his loan, the benefit on event the risk occurs is paid to the creditor. The minimum finite loan repayment period is usually 12 moths. After this, the debtor has to find other means to repay the loan. This period is usually long enough to start working and find other means of repaying the loan.
Difference between Payment Protection insurance and other forms of insurance
1. It is quite hard to determine if its the right product for you.
2.Some Conditions like payments in lieu of notice may make a claim in eligible even though the claimant is truly unemployed
3. The benefits are not paid to the person who pays the premiums, they are paid to the creditor.
Controversies in Credit insurance
In this type of insurance, the number of claims accepted are lower than the claims rejected. The insurance is not sought by the consumer, in most cases, consumers are not even aware that they are insured. Since PPI is designed to protect creditors against defaulters, most credit card companies and banks sell it with their products This translates to many complaints of mis-sale and mis-handling of the insurance product.
Calculations of payment protection premiums
The price which is paid on credit protection differs depending on the lender. According to a survey done on 48 major lender shows that the PPI price ranges from between 16-25% of the debt amount. The premiums can be paid monthly or be charged on the total amount of the loan. This method of charging the premiums on the total amount of the loan is known as Single Premium Policy. This increases the total amount paid by the debtor to the credit provider.
A protection payment insurance claim is usually paid to the creditor. A PPI insurance is very useful, but many times it has been mis-sold, leaving the buyers with a Credit insurance they have no use for. The affected use can claim PPI payments including incurred interest . According to the law, the lender has legal obligations to offset any PPI refunds against any debt. In case of any value left over on a credit card insurance,its supposed to be paid to the borrower.