There are so many different types of insurance available for different reasons. Some of them are absolutely critical if you’re a savvy consumer. On the other hand, many either aren’t necessary or depend significantly on the situation. If you’re not familiar with a type of insurance, then it can be extremely difficult to determine whether or not you need it. For example, many people don’t know about Payment Protection Insurance. What is it and when do you need it, if ever?
What Is Payment Protection Insurance?
Payment Protection Insurance (PPI) is a type of insurance designed to protect you in the event that you become unable to make payments on a loan.
Payment protection insurance may be known as different names including:
- Payment protection plan
- Credit protection or credit insurance
- Mortgage protection insurance
The general idea is that:
- You take out a loan.
- The loan has a set repayment plan. For example, mortgage payments on your house.
- Something terrible happens and you can’t meet those payment requirements.
- If you have Payment Protection Insurance, then it may cover those payments for a period of time.
In other words, you pay for insurance to help you make payments in the future in the event of unpredictable difficult financial situations,
How to Get Payment Protection Insurance
You might get PPI through various sources. For example, your mortgage lender may offer this as a service to you. Likewise, your credit union may have Payment Protection Insurance. The Firefighters Community Credit Union offers PPI to their members. Working with a credit union often allows you to tailor your insurance to your exact needs which can definitely be an asset when choosing types of insurance.
This particular credit union notes that they offer PPI on a number of different types of loans including:
- Second mortgages
- Car loans
- Personal loans
If you become disabled or unable to work for some reason during the repayment period of the loan, then your insurance should kick in. It will cover the loan payments for a specific period of time as outlined in your agreement. If you pass away, some or all of the loan may be forgiven, which can be an asset to your heirs.
Other Types of Payment Protection Insurance
There are various clauses and types of Payment Protection Insurance. That described above is most common. However, you should read the fine print to find out what kind of insurance you’re getting.
For example, in some instances, the purpose of Mortgage Protection Insurance is sometimes to protect the lender, rather than to protect you. The rule might be that if the homeowner dies before paying off the loan, the insurance pays the lender. This benefits the lender. That said, it might also benefit the homeowner’s estate. It really depends on the terms of the plan.
The key thing is to understand that there are different types of PPI. There are similar types of protection that have key different things to consider. Therefore, before you even ask yourself if you need Payment Protection Insurance, you really need to ask yourself what it is you’re trying to get.
When You Need Payment Protection Insurance
You probably don’t need to get Payment Protection Insurance if you’re taking out a small loan. If you expect to be able to repay your loan quickly, then chances are that you’ll do so before encountering any strange issues that prevent repayment. Moreover, you likely have other options in the event that something does happen with a short-term small loan.
Large and Long-Term Loans
However, if you’re taking out a large loan and/or a loan with a long-term repayment plan then you might at least want to consider PPI. For example, let’s say that you’re taking out a twenty-year second mortgage on your home. A whole lot can happen in the next twenty years. It’s certainly feasible that you could become ill or disabled, preventing you from earning the income you expect to earn for those repayments. As a result, you might want to consider insurance that protects you in the event such a thing happens.
Likelihood of Payment Problems in the Future
If you think that there’s a good chance that you’ll have problems with repayment in the future, then it could be well worth it to consider Payment Protection Insurance. However, many sure that you are very clear about what does and doesn’t qualify for the insurance to kick in.
The Money Advice Service says that PPI typically covers lack of payments due to:
- Circumstances that stop you from working such as becoming a full-time care provider to a loved one
- Job loss due to redundancy, but note that this may require additional coverage outside the original PPI terms
That said, there are a lot of exemptions to PPI. If you’re unemployed or self-employed, this plan isn’t going to help you. Only certain illnesses are covered by this insurance. Moreover, if you have pre-existing conditions, then these likely won’t be covered. Additionally, most policies have a period during which you aren’t covered (such as the first 90 days after the illness or disability.)
So, if you have a suspicion that illness, disability, or job loss could lead to payment problems in the future, then you might want to consider the protection of PPI. However, if you know that this is due to a pre-existing condition, then you might need to weigh your options carefully. There’s no point paying for insurance if it won’t cover you!
Alternatives to Payment Protection Insurance
You might also forego Payment Protection Insurance if you already have other options that will cover payments for you in the event of illness, disability, or death. Examples of such alternatives include:
- Emergency savings for just this type of situation
- Assets that you can sell in the event of such an emergency
- A partner or loved one who could help cover the bills if needed
- You have employee benefits and/or sick pay that would help you during a down period
- You have other types of insurance that cover the type of issues such as life insurance or disability insurance.
What types of insurance do you consider necessary? Let’s discuss in the comments below.
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