FAQs – Loan Payment Protection Insurance

What does it do?

This insurance is designed to ensure that even in the event of you becoming involuntarily unemployed or unable to work because of sickness or accident the normal repayments due each month on an outstanding loan continue to be made.

How does it differ from mortgage payment protection insurance?

Both are forms of payment protection insurance. As the labels suggest, loan payment protection insurance will ensure that ordinary loan repayments continue to be made to your lender, whilst mortgage payment protection insurance will ensure that your mortgage repayment commitments continue to be met.

What sort of loans can be covered?

Any loan from a registered lender, duly authorised by the regulator, the Financial Services Authority, can be protected by this insurance. Loans that might have been advanced by a member of the family, therefore, would not be eligible for such protection.

Is there a limit on the size of the loan that can be protected?

Policies will indicate the limit on the amount of loan repayments that can be insured. Typically, this will be up to a maximum of 125% of the loan repayments, provided these do not exceed £1,000 per month, or 65% of monthly income (before tax and other deductions).

For how long does the loan protection last?

In the event of the policy holder being incapacitated to work or being involuntarily unemployed, this type of insurance will typically pay the monthly benefits – equal to the loan repayments – for up to a maximum of 12 months. Some policies will offer a longer period of protection – for up to 24 months, for example – but, of course, the premiums for such a level of cover will be considerably more expensive. Loan protection insurance is principally designed to cover temporary incapacity or unemployment rather than events with longer-term repercussions.

Who is eligible?

Eligibility for loan protection insurance relies on your being in regular employment in the UK, Channel Islands or Isle of Man at the time the cover commences and on your having been so employed for at least six months previously. Eligibility will also depend on your being of working age – i.e. between 18 and 65 years old.

What about exclusions?

As with all forms of insurance, the particular policy you buy will have its own set of detailed exclusions, which will be explained and set out in the policy documentation. It is important that you have read and understood the exclusions, which in very general terms are likely to relate to pre-existing medical conditions (which might be entirely excluded or to which special terms and conditions will apply) and to the reasons for which claims arising from unemployment will be entertained (these will make clear that unemployment must have arisen entirely involuntarily).

Is there a complaints procedure?

A number of payment protection insurance products, including loan payment protection insurance, have been the subject of complaint and investigation by both consumer groups and the industry regulators in recent years. It is important that any prospective policy holder, therefore, should be reassured that complaints about any aspect of a purchased loan payment protection insurance policy should be addressed in the first instance to the insurance provider. If this fails to secure an adequate explanation or remedy, the consumer is entitled to pursue the complaint in writing to the Financial Ombudsman Service (address: South Quay Plaza, 183 Marsh Wall, London E14 9SR).

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