Payment protection insurance (PPI) is commonly sold when someone is taking out a loan or mortgage. It is intended to protect the borrower if they are unable to make the regular monthly credit payments because of illness, accident or unemployment. It is sometimes called ASU insurance - accident, sickness and unemployment insurance.

PPI is big business for both the insurance company providing the policy and the lender who arranges cover as part of the loan application. Over 20 million policies are in force with gross annual premiums of £20bn and every year over 7 million new PPI policies are sold worth an estimated between £250 to £300 million in profits to some of the big banks.

PPI can be a lifesaver of course. For some people making a successful claim can be the difference between financial survival or not. Yet only 4% of policyholders ever make a claim and 1 in 4 of these is refused.

Unfortunately many policyholders have found that their claims are turned down because of exclusion clauses and administrative barriers and at the time when they need help the most. And for some people they may not even be aware they have PPI.

Premiums can add 20% or more to the total loan, adding to their indebtedness and charging interest on top.

A survey by the Citizen's Advice Bureau in 2005 found a disproportionately high number of complaints about rejected claims. 85% of claims were unsuccessful yet for insurance claims in general the figure is just 15%.

The survey found that:

1) PPI is not cheap

The table below illustrates that in some cases PPI can represent 56% of the amount borrowed. Premiums are often charged as single premiums and added to the loan at the outset. Credit cards add payment protection monthly based on the balance outstanding.

In spite of the hefty premiums PPI does not guarantee to pay off the loan or meet all the remaining payments. Payments are normally limited to 12 months.

Estimates suggest that PPI premiums are about three times the cost of providing the cover meaning borrowers could be over charged by over £3bn per year

2) PPI is designed to exclude

PPI products contain many clauses that exclude people from cover.  Bad backs and mental health problems are normally completely excluded from policies while people who are self employed or working on contract or temporary basis are also excluded.

•3.   3)  Sales techniques

The CAB survey shows widespread selling of policies and the use of high pressure selling or unfair practices such as inertia selling. These force people to take out insurance that they cannot afford or do not want or need.  

•4.   4) PPI claims administration

Handling of PPI claims is often very bureaucratic and insensitive to the needs of customers at a time when financial pressures are growing. Slow handling of claims has often led to lenders adding administration fees due to late payment and in some cases pursuing court action

In some cases insistence of medical evidence is a barrier to making a successful claim. The cost of obtaining such evidence can be too high for people who have little or no other income at that time.

•5.   5) Regulation of PPI

In 1995 Citizens Advice reported similar problems with PPI suggesting that a decade or so later not enough has been done to address the failures of PPI .

Although the Financial Services Authority (FSA) has responsibility for general insurance, it does not regulate competition or price.  Rules against mis-selling and the vague wording of policies is poor.  The Office of Fair Trading (OFT) has also not taken action

6) Mis-selling

Selling PPI alongside loans, credit/store cards and mortgages has been very profitable for lenders through the commissions they have earned. Sales staff have been heavily targeted and themselves earned healthy bonuses for the policies signed-up.

Unfortunately this has led to aggressive and inappropriate selling with many customers paying heavily for insurance they didn't need or would never be able to claim on.

You may be able to claim on the grounds of mis-selling if at the time of arranging the insurance:

You can claim even if your loan, credit card or mortgage account is now closed and in some cases even if the policy was arranged more than six years ago.