Mis-selling of Life Cover and Payment Protection Policies

The mis-selling of life insurance policies by a significant number of mortgage lenders has to be addressed by the Government. Action has been taken by the DTI, who have nearly completed their investigation into the tie in of home insurance with mortgages. An announcement barring the practice is expected very shortly.

However the investigation has been criticised by some senior figures in the industry for ignoring the selling of life cover. The criticism centres around the practise of overcharging for life insurance, whilst not offering sufficient choice of products as part of their mortgage packaging. Ray Bolger from John Charcol, the independent financial adviser, says that the DTI’s knowledge of mortgages fall short of the standard required to make their investigation credible. The result being that life cover has been overlooked.

Mr Bolger believes that just as some providers have been called to account for tying building and content insurance to a mortgage, so should the sizeable number of lenders who mislead people into thinking that they have to take out life cover with their mortgage. Mr Bolger continues by saying that although lenders may not insist on customers taking out life insurance, they can be persuaded that they have no choice through being economical with the truth.

60 per cent of life insurance is sold by mortgage lenders, although it can be purchased through direct providers or independent advisers.

However a DTI spokesman has said that their investigation continues into a large range of insurance tie-ins. A lender who met Stephen Byers has said that life cover has been looked at in passing, whereas more emphasis has been placed on home insurance.

The problem of customers being forced to buy uncompetitive life cover and home insurance policies is equally important for both products.

The problems are even more acute with payment protection insurance.(PPI) Around half of all consumers who have been persuaded to take out a payment protection insurance (PPI) may have been sold the wrong product. In addition the majority of those who bought one of these controversial policies expect far more than they would actually receive if they could not pay their bills.

A wide-reaching survey has found that around 25% of people believe that they will earn a monthly income from their PPI policy, rather than understanding the policy would only cover their debts.

A further 15% said they believed the policy would cover them if they could no longer meet their repayment obligations for any reason, and 8% said they thought their medical bills would be paid if they fell ill.

Several people thought the policy would continue indefinitely to meet their debt repayments, others thought their policy would cover motor car breakdowns and household bills.

Annual sales of PPI policies are said to generate premiums of around £5.4bn for the finance industry. However a staggering £4bn of this is said to be pure profit. Studies suggest that some banks charge up to 600% more than others for similar.

The Office of Fair Trading is investigating the sale of PPI following complaints from Citizens Advice and the National Consumer Council. It recently highlighted concerns that banks are luring in customers by advertising apparently cheap loans and then hitting them with huge extra costs by selling expensive PPI as part of the deal.

As a result, a loan which may appear to offer good value turns out to be far more expensive.

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