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Payment protection insurance: payment protection insurance is sold to borrowers providing reassurance that credit repayments will be covered if they fall on hard times, due to unforeseen events including redundancy, disability or illness.

As mentioned in last month's article, the sub-prime crisis has sent shockwaves through the financial services industry and caused substantial losses to financial markets globally. Fears and problems relating to other forms of sub-prime credit, including credit cards, retail and commercial loans, are increasing as well, thus causing financial uncertainty at all levels.

Market analysts believe that a slowdown in the economy could be more significant than previously believed and there could be a negative impact on the job market for up to 48 months.

In industrialised countries, the majority of workers carry some form of debt, whether it is a mortgage, car loan, credit card or overdraft. Those who wish to protect themselves against an inability to repay have a few options.

One is to transfer the risk to a family member with the resources to insure the financial commitment. Another is to purchase special insurance to cover the risk. Life and disability insurance can help cover most health risks, but job loss remains a major worry.

To that end, specialist insurers in Europe now offer Payment Protection Insurance (PPI) to cover monthly responsibilities--credit card, loan or general house-hold costs such as telephone bills, electricity or even rent--in the event of unemployment or disability.

One example is Genworth Financial, a leading global insurance company that offers a wide range of PPI products in Switzerland and across Europe.

Genworth Financial's General Manager in Switzerland, York Engelskirchen answered our questions about this product.

Brien Donnellon, Swiss News: In Switzerland PPI is virtually unheard of. Is it a new product?

York Engelskirchen: It is a relatively new concept in Switzerland but payment protection insurance has existed for over 100 years, helping consumers meet their payment obligations on outstanding financial commitments including mortgages, personal loans and credit card debt.

Payment difficulties can be due to involuntary unemployment, illness or permanent disability and death.

How does it work?

Payment protection insurance maintains the monthly repayments on outstanding financial commitments, such as mortgages, personal loans or credit cards, in the event of a misfortune such as illness, accident, involuntary unemployment, temporary incapacity, permanent disability or death.

PPI helps consumers to meet their payment obligations and to maintain financial status and lifestyle. It protects their relationship with the lender and helps to avoid arrears and repossession. For financial institutions it helps to manage their capital needs by reducing the frequency and severity of delinquency on loan portfolios.

Are there any restrictions?

Generally to qualify for PPI cover, the purchaser must be aged between 18 and 65 and either be employed for at least 16 hours a week or on a long-term contract, or have been self-employed for a period of time. Claims at Genworth Financial are processed in hours, but all PPI policies have a waiting period at the start of each claim before payments commence, to prevent misuse of the insurance.

Let's assume a consumer leases a car on January 1 with PPI, and is terminated on June 1. His monthly instalments would be insured from July 1, assuming a waiting period of 30 days. In the event of accident and sickness, the waiting period is generally 30 days.

The standard 'wait period' in the Swiss industry ranges from 60 to 90 days and at Genworth Financial we generally offer 60 days.

The product appears to be popular with banks and insurance companies.

The majority of PPI policies have a fixed premium regardless of sex, age or occupation making the paperwork uncomplicated, therefore insuring easy handling and understanding of the insurance product.

How long does Genworth payout on claims?

We handle claims quickly and, once received, the average decision is ten days. Once accepted, the payment periods vary depending upon the contract but are typically between 12 and 36 months. This is usually sufficient time for the claimant to regain employment or health.

How many insurance claims are accepted?

Generally speaking, 65 per cent of all claims are accepted and paid without further enquiry. In some cases we, as all insurers, require additional information regarding the claim.

Is there a demand for this type of insurance and need in the Swiss market?

The need as well as request for PPI is growing in Switzerland. This confirms the marketing research that has been done over the last few years and the uncertainties, such as a recession, that concern the general public.

Critics say that this type of insurance encourages debt. Is this true?

PPI offers an effective protection for individuals experiencing unforeseen events in their lives, eg, accident, sickness or involuntary loss of employment. Therefore, this is in compliance with the budget calculation of those taking a credit and above all else in line with the Swiss Consumer Credit Law (KKG) that has been in effect since 01.01.2003 that prevents consumers from over debt.

Further variations of PPI:

* Mortgage Payment Protection--Sold to individuals through the lending institution, to cover mortgage payments in the event of loss of employment, accident and sickness.

* Guaranteed Asset Protection--Sold to cover payments on car loans and equipment leases.

* Committed Payments--A variation of PPI that is not linked to any underlying loan and that can be tailored to match individual consumer needs. The covers may vary from accident and sickness, loss of involuntary loss of employment or even, in some cases, disability.

The bottom line

Each type of PPI has different waiting and termination periods as well as limitations and exclusions. These make it difficult to give a typical premium, however, as an example, let's look at a flexible PPI morgage protection product from the Graubundner Kantonalbank.

Their premiums are based on a percentage of the monthly insured sum. Currently they charge 1.52% for death capital, 1.04% for disability insurance, and 2.19% for unemployment. The maximum amount insurable in each case is SFr 2,500 per month.

So, perhaps the question worth asking is what price you put on peace of mind.

Brien Donnellon

Brien Donnellon is the owner of KEY INVESTMENT, a financial services company providing unbiased financial advice and solutions for Swiss-based expats, HR departments and foreign investors.

The company, formed in 1997, is authorised and regulated t)y the Swiss Federal Banking Commission.

For further information please visit www.keyinvestment.ch or write to bd@keyinvestment.ch or call 081 257 13 14
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Title Annotation:MONEY
Author:Donnellon, Brien
Publication:Swiss News
Date:Apr 1, 2008
Words:1049
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