Payment protection insurance facts for kids

Payment protection insurance (often called PPI) is a special type of insurance that helps people who have taken out a loan. It's designed to protect them if they can't make their loan payments because of unexpected events.

What is Payment Protection Insurance?

Imagine you borrow money from a bank to buy something big, like a car or a house. This is called a loan. You agree to pay back the money, plus a little extra (called interest), over a set time.

• PPI is an extra insurance policy you can buy when you get a loan.
• It's like a safety net for your loan payments.
• If certain things happen to you, the insurance company will step in and make your loan payments for a while, or even pay off the rest of your loan.

Why Do People Get PPI?

People get PPI to feel more secure about their loans. Life can be unpredictable, and sometimes unexpected things happen that make it hard to pay bills.

• Loss of Job: If you become unemployed and lose your job, PPI can help pay your loan installments until you find new work.
• Accident or Illness: If you have an accident or get sick and can't work, PPI can cover your payments while you recover.
• Death: If the person who took out the loan dies, the insurance company will pay off the remaining loan amount. This means their family won't have to worry about that debt.

How PPI Works

When you buy PPI, you pay a regular fee, usually added to your monthly loan payment. In return, the insurance company promises to help if you face one of the covered situations.

• If you need to claim, you contact the insurance company.
• They check if your situation is covered by the policy.
• If it is, they start making the loan payments for you, or pay off the loan entirely.

Criticisms of PPI

Even though PPI sounds helpful, it has often been criticized. Many people felt it was not always the best deal for customers.

• High Cost: PPI policies were often very expensive. The cost could add a lot to the total amount people paid for their loans.
• High Profit: The companies selling PPI, and the people who sold it, made a lot of money from these policies. This meant the insurance was often more profitable for the sellers than beneficial for the buyers.
• Mis-selling: In some cases, PPI was sold to people who didn't really need it, or who wouldn't be able to claim on it. For example, some people were sold PPI even if they were already retired or self-employed, which meant they couldn't claim for unemployment.

Because of these problems, many countries have had rules changed to protect customers better when buying insurance like PPI.