Nobody likes to think they might fall victim to a debilitating illness, serious accident or involuntary unemployment; going further and planning for such eventualities may even seem a little masochistic. But the truth is that we are all likely to face some tough times when we cannot work because of circumstances beyond our control. Getting through such times is stressful enough, without the additional worry of meeting your debt repayments - on your mortgage or other borrowings. A little planning beforehand, however, could help make that unforeseen life crisis a little easier to bear.

A recent BeatThatQuote survey asked: ‘How would you cover your monthly debt repayments in the event of involuntary unemployment?’ The results revealed that the vast majority of respondents (73.7%) would apply for a loan to see them through; 15.7% would trust in payment protection insurance; 7.8% would look to savings; and 2.8% would consider remortgaging.

Taking out a loan may seem like the obvious and, perhaps, only solution to keeping up your debt repayments, if the worst happens. But it might also be an expensive choice that fixes the short-term problem but creates an even bigger long-term debt. For example, if you were to take out a £12,000 loan to repay over five years at a 6.3% interest rate, it would cost you a total of £14,020.27 payable in monthly instalments of £233.67*. Even this might not be a problem, if you quickly find the new job of your dreams or make a speedy recovery. But it may also prove an additional cause of stress and financial hardship if things don’t get back on track as quickly or as easily as you had hoped.

The survey found that payment protection insurance (PPI) was the next favoured option to covering debt repayments when unable to work. But with only 15.7% of respondents choosing PPI, compared to over 70% choosing loans, there is clearly something unappealing about this recourse. Perhaps you know little about how PPI works or assume it will be very expensive? Or perhaps you’ve read some unfavourable press reports regarding the Financial Services Authority’s (FSA) investigation into PPI ‘miss-selling’? Either way, independent PPI providers, such as British Insurance, are now offering policies with monthly premiums from only £2.15 per £100 of monthly benefit. With the potentially cheaper cost of PPI compared to a loan, it is surely time to unravel some of the confusion to see what’s really going on in this market and where the reluctance lies.

The FSA review
Since 2005, the FSA has been monitoring the way PPI is sold, which has resulted in several providers receiving fines for miss-selling. In the wake of the FSA review, 11 firms have also stopped selling PPI permanently or temporarily, while they sort out their systems. FSA criticism levelled at financial organisations that offer PPI concerns inadequate communication with consumers. A number of providers have been accused of giving insufficient information about the full cost of the policies, and what they cover (including the exclusions). While PPI should be an optional addition to a loan or mortgage, the FSA also found confusion among some borrowers, who had been led to believe that PPI cover was an obligatory component of taking out the loan.

The good news
Such ongoing scrutiny may raise concerns about the value of PPI altogether, but the investigation is also forcing all financial institutions to review their systems and methods of selling policies. With banks, building societies and independent providers now having to meet strict FSA guidelines, you should find that the days of just ticking the ‘yes’ or ‘no’ box to PPI cover on your loan application are long gone. Instead, you should receive better and clearer advice and you should find it far easier to compare and choose between different PPI providers.

What are the options?
In the past, you may have only seen PPI cover as an option on a loan application. But PPI actually covers a number of circumstances; nor do you need to purchase PPI from your existing loan provider. You can shop around for the best deal for you. The three options you will come across are as follows:

• Mortgage payment protection insurance. Covers your mortgage outgoings for up to 12 months if you can’t work due to illness, injury or involuntary unemployment.
• Loan payment protection insurance. Protects your loan repayments should you find yourself unable to work due to illness, injury or involuntary unemployment.
• Income payment protection insurance. Pays a monthly benefit for a maximum of 12 months if you can’t work as a result of accident, sickness or involuntary unemployment. As this policy is not linked to any particular debt, the benefit payments can be spent as you wish.

Other factors
In addition to the different types of cover, you should also be aware of other features to PPI cover, including the exclusions. The following tips provide a basic overview of issues you may want to consider before buying:

• PPI should be optional. You should not be refused a loan if you decide not to buy it.
• PPI only pays out for a set period of time, usually 12 months, although this is sometimes extended to 24 months. Another insurance policy called "Permanent Health Insurance" covers more long-term needs in the case of illness or disability, but this differs from PPI in that it doesn’t cover involuntary redundancy.
• To successfully claim on the unemployment part of the policy, you will typically need to have been continuously employed for at least 12 months, on a permanent contract, and by the same company.
• If you are self-employed, you should check the policy carefully as it may not cover you.
• You may not be able to claim for illness if you have a pre-existing medical condition - ie, an illness or condition that you already have or had before purchasing the policy.
• Stress or back complaints, and possibly some other conditions, may not be covered, even if you can't work because of them. Policies may differ, however, so it’s worth checking the details beforehand.
• If you purchase a policy but then change your mind, you have a legal right to cancel and get a refund. You will need to confirm your cancellation within 14 or 30 days of taking it out, depending on the provider.

The above tips are only general and each policy provider will differ in what they can or can’t offer you. As with any purchase of this kind, you should take the time to research your options and consider your needs carefully, before you sign up. But with the FSA strictly monitoring the PPI market, and the providers overhauling systems and processes to comply, you may find this insurance option an ever-more credible and cost-effective safety net for whatever your future holds.

Reference:
* Figures based on the BeatThatQuote.com loan calculator, using one of the lower interest rates currently on offer by loan providers. This is only a general guide that does not take into account the borrower’s personal circumstances, including credit rating.