The case for protection

There has been an explosion in the amount of credit advanced to borrowers in recent years. A general relaxation of criteria among lending institutions combined with low interest rates has led to a substantial increase in consumer borrowing.

The massively increased popularity and availability of credit cards has also helped to fuel a huge rise in demand for consumer credit.

Borrowers often fail to appreciate the strong case for taking out creditor insurance. Some mistakenly believe that state benefits will provide a cushion should they find themselves unable to keep up loan repayments.

This might help to explain why as many as two in five borrowers opt not to take up creditor insurance.

Those borrowers who do take out creditor insurance typically do so at the same time as taking out a loan or mortgage, rather than insuring the risk at some point thereafter.

Creditor insurance providers normally require that an applicant is the first-named borrower on the loan agreement, and that they are between 18 and 64 years of age and currently in employment.

While different providers' policy wordings may vary in detail, the main features of the cover remain essentially similar.

Typical cover
Creditor insurance provides cover against accident and sickness. A typical scheme will require there to have been a continuous period of at least 30 days' absence from work.

One thirtieth of the monthly benefit will then be paid for each day's absence due to sickness during the period of cover. Absences must typically be supported by medical certification. In practice the general heading of sickness covers both sickness and injury.

The redundancy/unemployment benefits included in creditor insurance are often seen as a key selling point.

Perhaps surprisingly, surveys repeatedly suggest that consumers regard them as the most important aspect of the cover. Although the unemployment rate in the UK is currently relatively low, many individuals suffer from job insecurity.

Borrowers do not always have a very clear understanding of the nature of creditor insurance cover. It seems that some equate the benefits with those offered through the social security system. In reality, of course, like any other type of cover, creditor insurance policies inevitably contain restrictive terms and conditions.

Almost all stipulate waiting periods of 30 days or more before a claim can be made after cover is taken out. Likewise, benefits only remain payable for a restricted period. A common limit for unemployment benefit payments is 12 months, although some contracts offer up to 24 months.

Most providers will not pay claims involving sickness or accident related to a pre-existing condition, or unemployment resulting from dismissal on grounds of misconduct. As with personal accident and sickness insurance, there will be exclusions for uncomplicated pregnancy or childbirth, self-inflicted injury, and any condition relating to addiction or dependence on drugs or alcohol.

Loan condition
Where cover is taken out, it is normally arranged by the financial institution providing the mortgage or extending other forms of credit, and any claims payments are made directly to the lender.

Individual borrowers receive a certificate summarising the cover and the claims procedure. Particularly where large sums of money are concerned, lenders may insist on cover being taken out as a condition of making the loan.

ABI research has shown that 15% of those purchasing creditor insurance claimed under the policy, with the highest rate (32%) among personal loans.

In the case of death of an insured, claims under the life section of the policy cover the personal representatives of the deceased, who must provide the lender or insurer with the original death certificate.

In the case of accident, sickness and unemployment, a claim form will be sent to a designated address for the insured to complete and return - typically within three months of the date when sickness or unemployment began. Medical evidence will be required, as may the claimant's submission to a medical examination.

Unemployment claims must normally be supported by proof of any job application, and a copy of the jobseeker's agreement signed with the benefits agency.

Continuance of the claim will typically require submission of a continuation claim form, and resumption of work must be notified immediately so that the final benefit payable can be calculated.

It is an offence to continue to claim after resuming work and the lender will be entitled to cancel the insurance and recover the overpayments if fraud is proven. They may also report the matter to the police, which could lead to a criminal prosecution.

The ABI research mentioned above was prompted by media criticism and a perceived lack of understanding among the general public alleging creditor insurance to be complex and expensive.

There is also a strong feeling that take-up of creditor insurance is too low due to over-optimistic perceptions of the extent of support available from the state.

Any general downturn in the economy is likely to fuel consumer uncertainty and therefore an increase in demand for creditor insurance products as people become nervous about their financial security and their ability to repay loans or credit cards. IT

' Ian Jerrum is managing director of Searchlight Solutions Insurance Training. This feature is based on material available on Searchlight's Tick e-learning system

Payment protection insurance

Creditor insurance, or payment protection insurance as it is often known, covers borrowers against the cost of repaying a loan should they become unable to work as a result of accident, sickness or involuntary unemployment.

Although it is often described as a benefits policy, creditor insurance remains subject to terms and conditions in exactly the same way as other insurance policies - a fact not always fully taken on board by those taking it out.

Test yourself on creditor insurance
Q1: Approximately what proportion of borrowers do not take out creditor insurance when borrowing?

Q2: Creditor insurance providers normally require applicants to be within which age range?

Q3: How many days' absence are normally required before creditor insurance policies will pay out for unemployment/redundancy benefit?

Q4: What is the normal period during which unemployment/redundancy benefit will be payable?

Q5: What percentage of those taking out creditor insurance are likely to claim?