Payment Protection Insurance (PPI) pays your loan or credit card interest if you aren't able to keep up the repayments yourself, say if you've been made redundant or can't work due to illness or for whatever reason. You'd think that sounds like a very good thing. Peace of mind that you won't be dragged off to a debtors' prison for missing those vital repayments. Great.



Not so great in fact. With a single premium PPI policy you actually end up paying a lot more interest, as a lump sum gets added to the policy upfront and is treated as part of your loan. That means you are charged interest on the new increased amount of your loan.

These single premium policies have been heavily criticised for being expensive, but also because people aren't helped to understand all the terms, including restrictions on claims, which are buried in the small print. Often part-timers or contract workers find they aren't covered when they bought the policy in good faith.

According to the consumer group Which?, there could be up to two million policy-holders who have not been able to claim on their payment protection insurance. It advises that anyone sold a single premium PPI policy alongside a loan in the past should check in case they may be entitled to a refund.

The Financial Services Authority (FSA) has been worrying about customers getting a raw deal with this type of policy and has urged the banks to stop selling them, or rather mis-selling them, as their customers have often been persuaded to take out a policy to cover an unsecured loan and the terms have not been properly explained. A spokesman for the FSA stated, "Customers being sold this type of product should be told how the product works, what it covers and how much it costs - especially as the cost of the PPI is added to the loan and interest charged on this amount."

Some of the big banks including Lloyds TSB, Halifax, Bank of Scotland, Barclays, RBS, NatWest, Alliance & Leicester and Co-Op Bank have taken the criticism on board and have announced that they are ceasing sales of single premium PPI policies. Most banks will continue to sell PPI, but with monthly instalments of the cost rather than a single premium payment.

The FSA is pleased with this step and hope that other banks will shortly follow their example. The demise of the single premium policy is not the end of payment protection policies, nor should it be. The FSA "recognises the importance of appropriate protection insurance in the current economic climate" and spokesman Jon Pain, the FSA's retail markets MD is quite clear about that.

"A PPI product can be helpful for customers wanting protection on a specific credit agreement, as long as the policy is sold appropriately. Consumers can visit our website, Moneymadeclear, to get information on their protection choices and use our tables to compare PPI policies," he says.

The Association of British Insurers (ABI) is keen that all the hype about mis-selling should not put people off buying payment protection in these troubled times, saying, "We think people should think very carefully before doing anything that would leave them without unemployment protection in the current economic climate."

"The ABI believes that PPI is a valuable product where it has been sold properly." In October 2008 unemployment claims on PPI policies soared by 113 per cent compared with October the previous year. This trend looks set to continue. "The ABI and its member companies have been working with the regulator to ensure that when people take out PPI they understand what it costs and what it covers so they can make an informed choice."

A spokesperson for Lloyds Banking Group agrees. "The increased volume of claims we have seen from customers over recent months clearly demonstrates that PPI is a product of real value, offering peace of mind and protection for consumers if their circumstances change and they become unexpectedly sick or unemployed," he said."The ABI believes that PPI is a valuable product where it has been sold properly." In October 2008 unemployment claims on PPI policies soared by 113 per cent compared with October the previous year. This trend looks set to continue. "The ABI and its member companies have been working with the regulator to ensure that when people take out PPI they understand what it costs and what it covers so they can make an informed choice."

A spokesperson for Lloyds Banking Group agrees. "The increased volume of claims we have seen from customers over recent months clearly demonstrates that PPI is a product of real value, offering peace of mind and protection for consumers if their circumstances change and they become unexpectedly sick or unemployed," he said.