Brits could be wasting some £350 million each year on payment protection insurance (PPI) which does not pay out, a new study reveals.

Financial research company Defaqto found that only a third of loan providers and 60 per cent of credit card companies allow people to see the full terms and conditions of their policy before applying for credit.

This means they only find out what their cover provides when their loan, mortgage or credit card is approved.

Defaqto's study, Payment Protection Insurance in the UK 2006, reveals that the wordiness of many policies can be misleading.

It identifies four different types of policy which seem similar but have significant differences in how they accrue benefits and make payments. Customers are consequently left in the dark when it comes to securing the best deal for their needs and the amount of money they would receive if they made a claim.

Many insurers only ask for minimal information on health and employment which can result in some people paying for cover from which they are actually excluded yet this only comes to light after a claim has been made.

Brian Brown, associate director at Defaqto, said: "The current situation is clearly not working as well as it could and is ready for an overhaul.

"Insurers should conduct a proper customer demands and needs analysis before making a recommendation to take out this insurance. They should also spend more time explaining to the customer what information is required and use common terminology and graphics to explain how their policies work.

"And the industry should publish statistics for the claims acceptance and rejection rates for major classes of PPI to show the commonest reasons why claims are rejected."