Guide to protecting your debt repayments

PROTECTION insurance is a confusing area with products coming under a variety of names. The umbrella term payment protection insurance (PPI) has been used loosely to describe all cover aimed at ensuring one can keep up debt repayments in case of inability to work due to illness, injury or redundancy.

However, products lenders sell along with their personal loans and credit cards are usually worse value to stand-alone protection policies.

To read our guide to lenders' PPI, click here.

Stand-alone policies are often called 'income protection' instead. They pay a monthly replacement income, which is often directly related to one's debt repayment requirements, for one or two years in the event of accident, sickness or unemployment – hence its alternative name of 'ASU cover'.

To complicate matters further, 'income protection' is also used to refer to 'permanent health insurance' – a more costly long-term policy that will pay an income indefinitely if you can't work because of accident or illness. Hence, ASU cover is sometimes also called 'short-term' or 'budget' income protection to distinguish it from this product.

Short-term income protection/ASU cover

These policies pay out an income for a year (or in some cases two) if you lose your earned income because of accident, sickness or unemployment. The policyholder sets the level of income they wish to receive: you might want to cover just debt repayments - or to account also for bills and other outgoings, which will bump up the premiums.

Moreover, a cheaper policy is now available that will pay out for only three or six months.

You can also choose whether you want to cover for just accident and sickness, or just unemployment, or all three (the last being the most expensive). There will be an exclusion or excess period before the policy begins to pay out of 30, 60 or 90 days – policies with long excesses should be cheaper.

Unemployment cover can only be obtained if you have been employed or self-employed for a certain period of time and exclusions usually include:

• Unemployment resulting from industrial action, misconduct, voluntary unemployment or redundancy, or resignation.
• Situations you were already aware of when signing the application form.
• If you are not registered as unemployed or not seeking alternative employment.
• Loss of work which is a normal incident or seasonal occurrence in your occupation.

Accident and sickness terms will usually exclude:

• Any existing physical or medical condition you were aware of when signing the application form.
• Any disablement for which you had received treatment or advice during the year immediately preceding the start date.
• Any disablement for which medical evidence has not been provided by a registered medical practitioner.

ASU policies will only allow a single claim at which point the policy will be cancelled, and you need to re-apply to set up a new policy.

Some employers will continue to pay sick or injured staff for a certain length of time – so always ask your employer first to make sure you're not buying cover you won't need.

You can search and compare ASU policies using This is Money's deal finder.

Long-term income protection/permanent health insurance (PHI)

This pays you a replacement monthly income into the long-term if you are unable to work due to illness or injury. The amount of cover is based on a percentage (a maximum of 65-75% typically) of your gross earnings. Both employed and self-employed workers can get PHI.

The main difference with ASU is that PHI will pay out for as long as you are incapacitated - until your selected retirement age if necessary (although many firms limit this to 65). There is no limit on the number of claims you can make.

PHI generally covers only for accident or sickness – although policies have emerged which allow you to include one year of unemployment cover.

What is the Banking Code of conduct?

It is a voluntary code of practice that minimum customer standards for financial services industry. It provides guidance for banks and building on how they should deal with over issues such as changes to rates and account switching.

Do all the financial institutions to the code?

All High Street banks and most building societies are signed up to the code - at the last count.

To find out if your provider subscribes, got to bankingcode.org.uk. Century, Harpenden and Penrith societies, as well as many credit have not signed up.

What are the recent changes?

The new code means more help for consumers in financial difficulties. For example, banks have agreed to waive or reduce recurring default charges, on a case by case basis, to help those customers who may be struggling with mounting debt.

There will also be more rigorous credit checks on customers to enhance responsible lending, plus further information about products and charges.

Subscribers to the code will no longer be able to close an account just because a customer has made a complaint. This has happened in cases where bank charges have been reclaimed.

The move is welcomed by Alan Rayward, 34, a self-employed computer salesman from Telford, Shropshire. Alan, who is married to Fay, 29, and has two children Alisha, 6, and Joshua, 4, had his bank account closed by Alliance & Leicester after he reclaimed £230 in unauthorised bank charges.