Loan Insurance is Under Utilized

By Simon Lance Burgess

As British consumers continue to borrower more and more money, it would make sense that they would also work harder to protect the assets purchased by their debt. Statistics seem to suggest this is happening. Overall, only about one third of Brits have payment protection insurance (PPI). However, about 60 per cent of new home owners have been adding mortgage cover to protect their investment. Borrowers have also been increasingly adding other common protection insurance products, including loan insurance and income payment protection.

A big reason for the increase in interest in PPI is better educated consumers. Surveys still show that many Brits do not know whether they have PPI coverage, or what the benefits are of the insurance. However, consumers are becoming more aware, thanks to consumer advocate groups and expansion of interest in broker provided insurance plans. Banks and lenders have held the industry somewhat captive, historically, by pressuring customers to buy loan insurance in combination with the loan product. They often packaged that protection with the loan, and sometimes indicated to borrowers that the loan provision was based on acceptance of the insurance protection.

Brokers offer much better service and ethical business practices. This has helped give the industry greater credibility and has painted a clearer picture to consumers of what to watch for when buying loan insurance. Consumers know that they do not have to feel pressured to buy the coverage from a bank or lender, and they also know to read the fine print of loan products to be sure premiums have not been slipped into their plan.

Benefits of loan cover include one to two years of monthly payments up to 75 per cent of the covered person's normal monthly income. Covered events include accident, illness, and involuntary redundancy. Insurance prospects may opt for any or all of the covers. Involuntary redundancy is a coverage opportunity to unique to PPI products, so even people well-covered with health insurance through work, often look to PPI as a source of unemployment protection in the short-term.

Payments usually begin 30 to 90 days following coverage application and are distributed monthly. Along with the income basis for determining coverage eligibility, plans also look to cover 100 per cent of monthly debt obligations and up to 25 per cent of additional expenses. These parameters must all fit within the maximum payout total for a plan, which is either 1500 pounds, or the 75 per cent of income option, whichever is lower.

Loan insurance is a way for debtors to protect the assets bought with debt, primarily their home and cars, but also a way to protect their financial security by not missing payments or having credit negatively affected. Consumers must take advantage of products provided by brokers and not rely on the State to meet their monthly needs. As of 1995, new home owners are ineligible for unemployment support from the State for the first nine months following the unemployment event.

Simon Burgess is Managing Director of the award-winning British Insurance, a specialist provider of loan insurance.