The "market study", starting early next year, is an official response to a "super-complaint" lodged in September by consumer support network Citizens Advice about the cover, which is also known as payment protection insurance (PPI).
Possible outcomes include imposition of a code of practice; enforcement action against firms suspected of breaching competition law; or a full investigation by the Competition Commission.
PPI is generally sold with mortgages, loans, and credit and store cards. It offers protection for a borrower's ability to make repayments in the event of accident, sickness or unemployment.
But concerns over sales methods, policy exclusions and product complexity have persuaded the OFT that a study is needed. These factors point to a "potentially high risk of consumer detriment" said John Fingleton, chief executive of the OFT.
Major issues include the difficulty of comparing PPI policies, lack of transparency of charges, high profit margins and low numbers of claims.
"PPI is a complex product, often bought almost as an afterthought," added Mr Fingleton.
"Borrowers may shop around for credit, but the complexity of PPI and a lack of choice mean they are less likely to shop around for PPI. Our study will look at whether consumers are getting a good deal or not."
Around seven million policies are taken out each year, the OFT said; in 2003, an estimated £5.4bn was generated in premiums.
The OFT study is the latest spotlight to be trained on PPI. Last month, City regulator the Financial Services Authority published research suggesting that sales targets could encourage mis-selling and that there was a risk of customers who aren't eligible to claim on PPI, such as some self-employed workers, being sold policies.
The Competition Commission's ongoing inquiry into store cards has also warned that lack of competition makes it difficult for customers to find rival PPI providers.
Fraud: Cheque misuse to be checked
Consumers will no longer be able to pay cheques into their personal accounts if they are simply made out to their bank or building society.
The clampdown, to come into force in October 2006, follows an anti-fraud agreement last week between the Financial Services Authority (FSA) and two industry trade bodies: the Building Societies Association and the British Bankers' Association.
Cheques destined for personal bank accounts will have to be made payable to the account holder, or have the person's name written clearly next to the financial institution. The new rule is intended to prevent fraudsters from intercepting the cheques and paying them into their own accounts.
This change has come in the wake of a high-profile fraud case last year. Michael Hart, a financial adviser, used cheques made out to a bank to defraud investors of nearly £2m.
Hart, who was sentenced to six years in prison, took cheques from ordinary investors made payable to Abbey (and other smaller institutions) and told clients he was investing them on their behalf with the bank.
He then deposited the cheques in his own account rather than in any genuine Abbey investments.
The case prompted the FSA and industry bodies to work together on a new code of practice. A consumer awareness campaign is expected before the changes come into force next year.
In 2004, cheque fraud cost the British banking industry more than £46m.
Financial 'inclusion': No-fee advice for Britain's poor
Free face-to-face financial advice could soon be offered to some of the UK's most deprived areas.
If plans by Citizens Advice (CA) and the Association of British Credit Unions (Abcul) get the go- ahead, a 15-strong team of specialist debt advisers will visit pockets of urban and rural poverty to offer free, impartial advice to families and to those on low incomes struggling to manage their debts.
The service will probably include guidance on repaying debt, budgeting, bill payment and savings.
The two bodies were invited to submit their proposals by the Department of Trade and Industry (DTI) as part of the Government's Financial Inclusion Fund, which aims to lift millions out of poverty and engage them with mainstream financial services.
It is hoped that the mix of debt advice from CA and the provision of affordable credit and savings schemes by the credit unions will give "people a range of options they can use to help them get their finances under control", said Mark Lyonette, chief executive of Abcul.
Financial inclusion has moved up the Government's priority list as it seeks to address the plight of Britain's poor, particularly the elderly.
Research from insurer Prudential suggests that nearly one in five pensioners live on less than £5,000 a year.
Property: House prices to stay flat in 2006
The price of the average house will barely move next year, according to two industry reports.
Nationwide building society, one of the UK's biggest lenders, suggested that, on average, there would be no inflation in bricks and mortar in 2006.
Hometrack, a property research company, estimated that the typical price would increase by just 1 per cent next year, and then by an average of just above 2 per cent annually over the following three years.
Their predictions came as the Bank of England's Monetary Policy Committee voted to leave the base rate unchanged at 4.5 per cent for the fourth consecutive month.
Many City analysts and economists believe the Bank will want to see consumer spending figures over Christmas before making any decision to change the cost of borrowing.
The base rate was last reduced in August, when it was notched down from 4.75 per cent to generate consumer confidence.
Although predictions are for an overall lack of house price movement, the forecasts hide expected regional variations.
"We expect the best prospects for growth to be in London, the South-east and Scotland - regions where affordability constraints are least pronounced," said Richard Donnell, Hometrack's director of research.
"Small price falls over 2006 are expected in most other regions, especially those that have seen very high levels of house price growth in recent years and where affordability levels are most stretched."