This could be the worst insurance ever devised.
This article was first sent to Fools as part of our 'The Good, The Bad and The Ugly' email series.
In this instalment of our popular "Good, Bad and Ugly" series, I'm here to warn you about a particularly ugly form of insurance. Indeed, it could well be the worst insurance ever devised.
Fool fans will know that I am the UK's biggest critic of payment protection insurance (PPI). For more than five years, I've been warning readers to steer clear of PPI, because it is riddled with faults. Hence, though buying insurance to protect you against death, accident, sickness and unemployment may sound like a good idea, PPI usually proves to be a huge disappointment.
In essence, PPI is hugely overpriced, widely mis-sold, and riddled with exclusions and get-out clauses. Thus, it is a huge money-spinner for the lenders which sell it. Indeed, as an ex-insider, I'd estimate that lenders and insurers made a profit of perhaps £5 billion by selling this tripe last year!
The PPI scandal runs right throughout the industry, including the following policies:
mortgage payment protection insurance (MPPI; the best of the bunch, but still lousy);
personal loan protection (PLP; the biggest slice of the £6 billion-a-year PPI market)
credit card repayment protection (CCRP).
Of these three types of policy, I'd crown CCRP as the biggest rip-off of them all. Indeed, I know that profit margins on CCRP policies can exceed nine-tenths (90%) of the premiums collected. In other words, a number of these plans cost ten times as much as they should. As proof, take a look at the following tables:
Credit card repayment protection: the good, the bad and the ugly
The good
Card issuer | Monthly premium (%) | Monthly benefit (%) | Cost of a £100 payout (£) |
|---|---|---|---|
Post Office | N/A | N/A | 4.50 |
Alas, CCRP is such an awful product that only one policy makes this list. It is the Post Office's Lifestyle Protection Cover, a stand-alone policy which costs £4.50 per £100 of cover per month. If you're wondering why this policy is so much cheaper than the rest, it's partly because I had a hand in its launch. Also, praise is due for Nationwide BS, which has broken ranks and doesn't sell CCRP at present. Hurray!
The bad
Card issuer | Monthly premium (%) | Monthly benefit (%) | Cost of a £100 payout (£) |
|---|---|---|---|
Cahoot | 0.77 | 10 | 7.70 |
First Direct | 0.78 | 10 | 7.80 |
Halifax | 0.78 | 10 | 7.80 |
Sainsbury's Bank | 0.78 | 10 | 7.80 |
Barclaycard | 0.79 | 10 | 7.90 |
Capital One | 0.79 | 10 | 7.90 |
Egg | 0.79 | 10 | 7.90 |
GM Card | 0.79 | 10 | 7.90 |
Goldfish | 0.79 | 10 | 7.90 |
HSBC | 0.79 | 10 | 7.90 |
Marbles | 0.79 | 10 | 7.90 |
NatWest, RBS and MINT | 0.79 | 10 | 7.90 |
Tesco | 0.79 | 10 | 7.90 |
As you can see, the majority of credit-card issuers charge a monthly premium of between 0.77% and 0.79% per £100 owed. These policies all pay a monthly benefit of a tenth (10%) of the outstanding balance at a start of a claim. Thus, the cost of this insurance works out at between £7.70 and £7.90 for a monthly payout of £100 during a claim. Not awful, but not great.
The hideously ugly
Card issuer | Monthly premium (%) | Monthly benefit (%) | Cost of a £100 payout (£) |
|---|---|---|---|
Co-op, Smile & Northern Rock | 0.76 | 5 | 15.20 |
Amex | 0.79 | 5 | 15.80 |
Lloyds TSB | 0.79 | 5 | 15.80 |
Virgin | 0.79 | 5 | 15.80 |
MBNA and Abbey | 0.72 | 3 | 24.00 |
Morgan Stanley | 0.76 | 3 | 25.33 |
Citibank | 0.85 | 2.25 | 37.78 |
These policies offer incredibly poor value for money, largely because they pay such meagre monthly benefits. For example, Lloyds TSB charges the same monthly premium as Egg (79p/£100). However, Egg's policy pays out twice as much to claimants and, therefore, Lloyd TSB's policy is twice as expensive as Egg's.
The real villain of this piece is Citibank, which pays out the lowest benefit, yet charges the highest premium. Frankly, this insurance is a disgrace and the Financial Services Authority should act immediately to curb this blatant customer abuse.
Furthermore, it's worth noting that you pay PPI premiums whenever your balance is above zero. This even applies if you pay off your balance in full every month, as millions of cardholders do. In this scenario, you're paying for rip-off insurance which is also entirely unnecessary. Oops!
In summary, CCRP is a complete and utter waste of money for 99% of cardholders. My advice is simple: cancel your credit card repayment protection today. The only people who should persist with CCRP are those who are about to make a claim, or are already receiving payouts from an ongoing claim.
Finally, if you must have this form of protection, try buying Best Buy cover from a stand-alone supplier, such as award-winning Fool partnerBritish Insurance. Otherwise, you're just being taken for a ride by your card issuer.
More: Lower your insurance premiums today | Why Insurers Ask So Many Questions | Insurances That Rip You Off