Insurance extras sold by car
dealers can be poor value
Just when you think you've made all the big decisions about
buying a car or motorbike, the dealer may offer you add-on
insurance. Add-on insurance car dealers sell is expensive, may have
low payouts and may only cover you in limited situations.
Avoid the sales pressure to sign up for add-on insurance and
only pay for the cover you need.
Is add-on insurance worth it?
Add-on insurance products are sold by car dealers when you buy a
new or used vehicle. The name of the insurance varies, but it
covers things related to the car. The insurance can cover a
breakdown or damage to the tyres and rims, or it could be related
to the loan you're taking out, such as if you are unable to pay
Buying a car can be a long process. You can spend hours
negotiating with sales people, making endless decisions about
fittings, finishes and extras, not to mention filling in
Avoid decision overload and make sure you:
- Arrive with a clear idea of what insurance extras you do and
- Stick to your guns and don't be 'upsold' if you don't want
what's on offer.
- Avoid making emotional decisions - buying a car is exciting but
it's important to stay calm and logical.
- Ask questions. If you're unsure about anything don't be afraid
to ask. Salespeople often only tell you the positives, but feel
free to ask about things like exclusions. It's your money after
Download our car app
The MoneySmart Cars app can help you navigate some of these
decisions as well as give you confidence and control when you go
into a car dealership.
Become an informed car buyer.
MoneySmart Cars app
Things you should know before
taking out add-on insurance
Before you sign up for add on insurance, here are some important
things to consider:
- Large dealer commissions - Car dealers
often get paid a commission of about 20% of the premium for selling
you add-on insurance policies. Dealers have an incentive to sell
you insurance and might provide you with a policy that isn't in
your best interests.
- Poor value for money - Add-on policies
sold through car dealerships are usually far more expensive than
policies sold through insurance brokers, banks and super funds. As
well, they only insure you for a limited range of situations, so
there is only a small chance you will be paid out. And the payouts
may be low compared to the premiums you have paid.
- Interest charges - Most add-on insurance
premiums are packaged into your car loan. This means you pay
interest on the premiums and this makes the insurance even more
expensive and adds to the amount you have to borrow.
- Full cost breakdown - Some lenders and
credit providers will only tell you the cost per month. Ask for the
full cost of the policy, including the cost of any interest payable
- Payout - Will the payout be higher than
your car loan?
- Excess - Will you have to pay an excess
if you claim on the policy, and how much will it be?
- Cooling off period - Is there a cooling
off period where you can cancel the policy at no cost if you decide
you don't need it?
- Claims - There may be only narrow
circumstances in which you can claim, so check what you can claim
- Limits - For consumer credit insurance
you may only be paid a percentage of the outstanding balance of the
car loan and payments may stop after a fixed period.
- Exclusions - Consider the restrictions on
the policy. You may not be able to use the policy if you have a
pre-existing medical condition, are above a certain age or your car
has exceeded mileage limits.
- Refunds - If you cancel the add-on policy
because you pay off the loan early or no longer want the policy,
you will usually receive a partial refund, but it will often be
less than the unused portion of your policy.
Refunds for unfair sales of
ASIC has identified unfair conduct by a number of insurers who
offer add-on insurance and extended warranties through car dealers
or finance brokers. As a result, the insurers agreed to refund over
$130 million to customers who were sold these products
If you bought an add-on insurance product from one of the
following providers, you may be entitled to a refund:
You can contact these insurers to check if your policy is
eligible for a refund. Check your car or motorcycle loan contract
to see if you held any type of add-on insurance with these
Types of add-on insurance
Consumer credit insurance
Consumer credit insurance (CCI), also known as 'loan protection
cover' or 'repayment cover', provides some cover if you can't meet
the repayments on your loan if you lose your job, are sick, injured
CCI is often sold in bundles and can include some or all of
these types of insurance:
- Car yard life insurance - covers the reducing
amount owing on your car loan if you die and your dependents want
to take ownership of the car.
- Sickness and accident insurance - covers some
or all of your car loan if you become disabled or sustain injuries
that prevent you from working.
- Unemployment insurance - covers your car loan
repayments for a short period (usually 3 months) if you lose your
Check what cover you already have before you buy consumer credit
insurance. If you have a job you will probably have some standard
life insurance with your super
To find out more, see our page on consumer credit
Comparing the cost of life insurance
Our cost of life insurance
infographic shows that you can pay up to 17 times more for life
insurance purchased from a car yard than you would if you bought
standard life insurance from a life insurance company or super
Gap insurance or loan termination insurance
Gap insurance (also called 'motor equity
insurance' or 'shortfall insurance') covers the lender for the
difference between what you owe on the car loan, and what the car
is insured for under comprehensive car insurance, if you write your
Loan termination insurance (also known as
'walkaway insurance'), covers the difference between the value of
your car and the amount outstanding on your loan if you return the
car because you can no longer make the repayments due to illness or
This type of cover can be very limited as it might only cover
you for accidental death (for example, if you are hit by a car),
not death as the result of an illness. Also, the amount paid will
be capped, and you don't get to keep the car as it will have to be
returned to the dealer.
If you have a comprehensive car insurance policy and write off
your car, the payout of either an agreed value or
market value should cover all or most of your loan. If your
comprehensive policy covers the whole amount of your loan, or your
comprehensive insurer rejects your claim, you won't receive a
payout from your gap insurer. This means your premiums will have
gone to waste.
The value of the car and the amount owing on your loan will
reduce over time, so the longer you keep a gap or loan termination
policy, the less likely you will receive a payout from your gap
Check the policy exclusions. If something were to happen to you
and you couldn't pay the car loan, would you or your dependents
want to keep the car? Loan termination insurance won't let you do
This is an extension of the warranty offered by the manufacturer
or the statutory warranty for new or used cars. It generally covers
original components and fittings at the time of purchase against
mechanical failure or defect.
Under the Australian Consumer Law automatic consumer guarantees
apply to a car regardless of any other warranty the dealer sells or
gives you. The specific details of automatic consumer
guarantees vary slightly by state but, in most cases, they should
continue to apply after the warranty has expired.
Find out more about consumer
guarantees on cars on the ACCC website.
Tyre and rim insurance
This covers damage to tyres and rims that occurs as a result of
blowouts, punctures and various road hazards (like driving through
a pothole). General wear and tear is usually excluded from tyre and
rim insurance coverage. See our tyre and rim insurance webpage
for more details.
Mechanical breakdown insurance
This provides some cover for the repair or replacement of
specific parts of your car if you suffer an unexpected mechanical
failure. See our webpage mechanical breakdown
insurance for more information on it is, and what you should
look out for.
How to make a claim, cancel or
complain about add-on insurance
Making a claim
To make a claim on your policy you'll need to follow the steps
outlined in your product disclosure statement (PDS). If
you are going to make a claim, it's best to lodge it as soon as
Cancelling a policy
You can cancel a policy at any time by contacting the insurer
directly. Details about how to cancel will be in your policy's
All policies allow a cooling off period, which is usually around
30 days. If you cancel during the cooling off period, you should
receive a full refund of the premium.
If you cancel outside the cooling off period, you will usually
receive a partial refund (calculated to a formula) and you may need
to pay a cancellation fee.
Complaining about add-on insurance
If you bought add-on insurance and think the way the policy was
sold to you was unfair or your insurer rejects your claim, and you
wish to make a complaint you should firstly contact the provider's
internal dispute resolution department.
If the provider rejects your complaint, or it remains unresolved
for 45 days or is not resolved to your satisfaction, you can
complain to the Australian
Financial Complaints Authority (AFCA) on 1800 931
Most add-on providers are a member of AFCA, which is an
independent body that can help resolve your complaint. However,
some warranty providers, including car dealers, are not members of
AFCA. This means you will need to negotiate directly with the
For tips on lodging a complaint, see how to complain.
Buying a car is a big decision, and the choices
and decisions that come with it can be overwhelming. Make sure you
understand what you need to know to safely navigate the process and
make the best choice for your needs.
Last updated: 07 Aug 2019