LOAN protection insurance has become an increasingly popular option for borrowers. When you purchase a car, for example, the bank inevitably offers you loan protection insurance in the event that you fall ill, lose your job or die. In most cases, the insurance adds what seems like only a few pounds a month onto the cost of repayment while offering a satisfying level of peace of mind.
Contrary to what many consumers may think, loan protection insurance, which is designed by insurance companies and sold by banks and building societies, does not pay off the loan should you fall ill or be made redundant instead, it continues to pay the interest and/or the capital element of the loan for the period you are unable to do so. Once you get a new job, return to work etc you resume the payments. It is only in the event of death that the policy clears the loan.
The Consumer Association of Ireland has just published a survey of this type of insurance in the latest edition of Consumer Choice magazine and has found it deficient in many respects. The Association concentrated mainly on benefit claims due to unemployment and surveyed all the main banks ACC Bank, AIB, Bank of Ireland, Irish Permanent, National Irish Bank, TSB and Ulster Bank.
It found.
. Policy holders must fulfil exclusion periods immediately after taking out the contract that ranges from one month (TSB) to four months (Ulster Bank). The other banks exclude cover for three months.
. Policy holders who bank with AIB, Bank of Ireland, Irish Permanent and Ulster Bank must be in continuous employment for between six to 12 months before making a claim. ACC, National Irish and TSB do not require this.
. Policy holders must be out of work for 30/31 days before they can make a claim.
. There is a maximum of 12 monthly payments allowed for each claim, after which you must wait another six months before making another claim.
. Four lenders ACC Bank, Irish Permanent, TSB and Ulster Bank refuse employment cover to people in fixed term employment contracts. The other banks will cover such people, but only for the remainder of their employment contract. For example, if you lose your job seven months into a 12 month contract, loan repayments will be covered for the remaining five months only.
. Up to 30 per cent of the first year's premium is taken in commission by the bank.
The Association found that the cost of insurance for a one year, £1,000 loan will cost an extra £3 to £5 a month depending on the bank (or £36 and £50 over a year). But to insure a five year, £5,000 loan the cost to the borrower is an extra £4 to £14 a month depending on the bank, or a total cost of between £240.00 and £840.00 over the five years.
Payment of loan protection insurance is usually restricted to monthly payments with only four lenders (ACC, Bank of Ireland, NIH and Ulster Bank) allowing you to pay a lump sum at the start of the loan. None of the banks allow annual lump sum payments. The Association also found that by factoring in the cost of insurance into the loan repayment (as opposed to separating the two payments) banks like AIB, Irish Permanent and the TSB also earn interest on your insurance debt.
As with all insurances and loans this survey shows how important it is to shop around for the best price, especially where larger sums and longer repayment periods apply. The Consumer Association also recommends that you read the fine print carefully and pay particular attention to the length of exclusion periods and the period of continuous employment required before a claim can be made.
Consumers should also keep in mind that under current consumer legislation conditional lending has been outlawed lenders cannot force you to take out loan protection as a condition of borrowing. Anyone who is put in such a position should report the matter to the Director of Consumer Affairs.
