Policyholders in a muddle

Confusion reigns in the payment protection insurance (MPPI) market according to a new survey released by the Association of British Insurers (ABI).

Payment protection insurance is unregulated and is sold typically at the point of buying a mortgage, although it can also be bought to protect other loans, such as credit cards.

Most policies cover individuals who are made redundant, have an accident or become too sick to work. But, most policies only pay out for a year, take at least a month to start paying and have a host of exclusions.

An astonishing 51% of the 980 policyholders questioned were clueless when it came to understanding how long their benefits would be paid out for.

One of the main reasons the product has been criticised is that it generally only pays for a maximum of 12 months - some policyholders believe it will pay out until they find another job or are well enough to return to work.

About half (49%) of the 980 policyholders questioned had no idea how long they would have to wait between making a claim and receiving payments. This period - known as the deferral period - is typically a month, but in some cases, particularly in the case of cheaper cover, it can be longer.

Mary Francis, the ABI?s director general said: ?We must continue to improve communications with policyholders both during and after the sales process so they can make a properly informed choice about whether to buy insurance.?

She added that the ABI?s key concern was the lack of awareness of just how limited government help was for mortgage holders who become unemployed. She pointed out that one in five consumers questioned felt that they could rely on the government to help them.

But, state benefits to support mortgage repayments are means tested, only pay the interest on a mortgage loan and, in many cases, take nine months to start paying out. She added that most of those questioned who had made a claim were satisfied with the payment and the smooth running of the process.

But, the actual research reveals that only 15% of those contacted in the survey had made a claim. Of this, some 81% who had claimed had received benefits. Even worse, although it is likely to help matters if the claim is accepted, there is no guarantee that having PPI will protect a home from being repossessed by the lender.

Despite this, about 43% of respondents believed that having PPI would work in their favour. There is no mention in the ABI?s report of the exclusions that can apply on these policies and, consequently, the distress these have caused some policyholders.

For example, absence from work as a result of stress is growing problem in the UK - but it is invariably a PPI exclusion.

Tony Boorman, the Insurance Ombudsman has said that the exclusion of mental illness from PPI is a concern and something he is trying to raise awareness of. Despite the negative aspects surrounding PPI, sales are increasing, particularly when this insurance is linked to mortgages.

The latest figures from the Council of Mortgage Lenders show that last year some 31.7% of home loans were protected compared to 28.8% for 1999.

Around 2.2 million mortgage holders in total are now protected by PPI. Figures for 2001 are due out this autumn and are expected to show another increase.

The Council of Mortgage Lenders deputy director general Peter Williams said: ?Since it was re-launched, this insurance offers better cover and value and these figures show that consumers are becoming more aware of that. Every home buyer needs to think carefully about how they would cope with their mortgage payments if they lost their job or were too ill to work."

Despite this, some independent financial advisers do not believe PPI is a good buy. Leeds-based Diane Saunders, who specialises in protection cover for women, said she would recommend income protection insurance as being more suitable for most people. Although this is likely to cost more, it often pays out for stress claims and in many cases can be taken out until retirement age.