Toxic PPI and acceptable STIP - how do we tell the difference?
I went to school many years ago and have forgotten much of what I learnt. However, I do remember an eccentric chemistry master in the 3rd form who tried to convince me and my equally gullible classmates that almost all living matter was composed of phlogiston.
This is a substance that miraculously appeared from the process of combustion. For those who care this theory was successfully countermanded by Lavoisier who underlined the role oxygen has to play in the process.
"That's a bit obscure and irrelevant," I hear you say, but I note that just as my mad chemistry master was trying to claim outrageous properties for phlogiston I note the term "short-term income protection" (STIP) being used increasingly to cover what looks like payment protection insurance (PPI) to me.
Let me make it quite clear that I am hugely in favour of STIP if the customer is clear about what he is buying. It may be the only type of IP he or she can obtain because of his job or circumstances and may often be entirely appropriate. But beware of products masquerading as IP which are much closer to PPI. If we invest the title "income protection" with some meaning it mustn't have its clothes stolen by impostors.
Following the investigation by the Competition Commission last year, the following was the definition given to STIP, which was confirmed as a form of PPI: "It means a contract of insurance which provides a pre-agreed amount paid directly to the policyholder or the policyholder’s nominee in the event the policyholder experiences involuntary unemployment or incapacity as a result of accident or sickness and which:
(a) has a maximum time limited benefit duration;
(b) may include or combine other forms of insurance cover or include other benefits;
(c) is written for a term which is less than five years and not predetermined by the term of any credit; and
(d) can be terminated by the insurer.”
Unemployment cover is an important aspect of the cover but I want to focus on the incapacity aspect. It is hard to differentiate there so how do we tell the difference between a toxic PPI plan and an acceptable STIP plan?
An expert in the subject described PPI as a product designed to meet the needs of distributors and STIP as a product designed to meet the needs of customers. Although this is very succinct, it is sadly even more complex than that. The trouble with most PPI is that it excludes about 50% of likely claims through pre-existing condition exclusions and is priced to pay high commissions and profit shares to distributors and very little to the carriers. These profit shares are not part of the STIP regime I envisage but I can see lots of understandable confusion being caused to all parties unless we make the differences more recognisable and clearcut.