Money Magic: Don’t run for cover

If you’ve taken out a loan or a new credit card recently you will probably have been sold insurance as well. You may not even know you have it. It’s called payment protection insurance (PPI) and generally it’s vastly overpriced for the limited protection it offers. Best thing to do is to cancel it.

PPI is supposed to make sure that if you can no longer meet your credit repayments the insurance company will pay them for you. It sounds a great idea. But, like all insurance, you only find out whether it works when you make a claim. And, as many people have found to their cost, insurers have many ways to avoid paying up.

If you lose your job you will only be covered if you were made redundant compulsorily and there was no hint of that happening when you took out the insurance. If you are dismissed for any other reason forget it. If you are too ill to work then you may not be paid if you have failed to disclose any previous health problems even if they are not relevant to the disease that has stopped you working now. And if you are over pension age or self-employed forget it – the chances of a payout are negligible.

Even if you do jump through all the hoops and make a successful claim you may not receive much benefit. Normally the payments do not start for 30 days and then last for no more than a year. On a credit card you will get the minimum repayment each month. On some loans you may just get the interest paid. So one year later you could be left with the same debt and the same problems.

PPI can double the cost of the loan and add pounds a month to your credit card bill. If you really do want PPI never buy it with the credit. Go to one of the independent PPI insurers such as www.britishinsurance.co.uk who will charge you around a fifth of the price taken by the banks and credit card companies.

If you already have PPI and think you may have been mis-sold there is more advice at www.moneysavingsexpert.com

Paul Lewis is a freelance writer who presents Money Box on BBC Radio 4