Add-on insurance

Buying insurance extras from a car dealer

Just when you think you've made all the big decisions about buying a car, the dealer may offer you add-on insurance. Some of the insurance car dealers sell is not very good value and you may already have some of this cover.

Here are some facts about the insurance extras sold by car dealers, to help you only sign up for the cover you need.

What is add-on insurance?

There are many different types of add-on insurance policies that might be sold to you when you buy a car at a car yard.

While you've probably put a lot of time and effort into researching the car, you may not have considered or even heard of all the 'extra' insurance offered to you by the dealer.

The names of these policies vary and they can be sold separately or bundled together in a range of different packages.

ASIC's Peter Kell talks about add-on insurance

Listen to ASIC Deputy Chairman, Peter Kell about talk the sale of add-on insurance policies through car dealers and how the market is failing consumers. 

Subscribe to ASIC View podcast via iTunes or PodBean.

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The MoneySmart Cars app can help you you navigate some of these decisions as well as give you confidence and control when you go into a car dealership.

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Video: Buying a car

Animated video about buying a car

Aunty B and Uncle Bob explain how add-on insurance can really increase the cost of your loan. 

This video is part of a series of animations created for the Take a minute with your money campaign

Transcript: Buying a car

Consumer credit insurance

Consumer credit insurance (CCI), also known as loan protection or repayment cover, provides some cover if you can't meet the repayments on your loan if you lose your job, are sick, injured or die.

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 job.

To find out more, see our page on consumer credit insurance.

Comparing the cost of life insurance

car insurance thumbnail

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 fund.

Do you need consumer credit insurance?

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 fund.

With standard life insurance, when you die your payout will go to your nominated beneficiaries, whereas with consumer credit insurance, the payout will go to your lender. The payouts from standard life insurance usually remain constant whereas your payout with CCI will reduce with the loan balance.

You may also have life insurance if you have a mortgage, as most banks suggest that you take out a life insurance policy to protect your property investment.

Consider your personal circumstances before you sign up for consumer credit insurance through a car dealer.

Many policies are sold to people under 30 with no dependents, which means they are paying for a policy that may be of limited value if they die.

Read ASIC's report, The sale of life insurance by car dealers: Taking consumers for a ride, to find out what ASIC found when they researched the add-on insurance policies sold by five life insurers in car yards.

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 car off.

Loan termination insurance (also known as walkaway insurance), will cover 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 injury.

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.

Do you need gap or loan termination insurance?

Before you sign up for gap insurance, check your existing car insurance cover.  If you have a comprehensive car insurance policy and write off your car, you will receive a payout and although the payout is based on either an agreed value or market value, it 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.

Also keep in mind that both 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 insurer.

Before buying loan termination insurance make sure you understand the policy exclusions. If something were to happen to you and you couldn't pay the car loan, think about whether you or your dependents would want to keep the car, as loan termination insurance won't allow you to do that. 

Find out more about different types of car insurance.

Extended warranties

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.

Do you need an extended warranty?

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.

If you would like to purchase an extended warranty, check exactly what is and isn't covered, as well as any conditions you need to meet to make a claim.

Tyre, rim, paint and windscreen insurance

This covers damage to tyres and rims as a result of blowouts, punctures and various road hazards.

Do you need tyre, rim, paint and windscreen insurance?

If you have comprehensive car insurance this will cover you for loss or damage to your car and any damage you may accidentally cause to other people's property. This means you won't need to insure paint, rims, windscreens and seatbelts separately. Check your PDS to see exactly what's covered in your existing policy.

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.

Things you should know about add-on insurance

Do car dealers get commissions for selling insurance?

Car dealers often get paid a commission of between 20-70% for selling you add-on insurance policies. Because their level of commission is so high, the dealer might not provide you with a policy that is in your best interests. 

Before you sign any contracts or agree to purchase any policies, check you really need the extra insurance.

Is add-on insurance good value for money?

If you decide to take out an add-on insurance policy make sure it provides good value for the premiums you'll be paying. 

Add-on policies sold through car dealerships are usually far more expensive than policies sold through insurance brokers, banks and super funds.

As well as being more costly, 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. 

If there is a particular type of cover you want to get, shop around and make sure you're getting a good deal.

While cost is obviously a big consideration, you should always compare the level of coverage, any restrictions and the excess you will pay. 

Will the insurance add to the cost of the car loan?

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.

Can I get a refund if I cancel the insurance?

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.

What to ask before taking out add-on insurance

Here are some important things to consider when you are assessing an insurance policy from a car dealer:

  • Cost - 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 on premiums.
  • Pay out - Will the payout be higher than your car loan?
  • 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?
  • Payment - How will you pay the premiums? If you add the premium to your loan, the interest will make the insurance more expensive.
  • Claims - What can you claim for? There may be only narrow circumstances in which 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 - 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.

Be prepared for the hard sell

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 paperwork.

Avoid decision overload and make sure you:  

  • Arrive with a clear idea of what you do and don't need in terms of insurance extras. 
  • 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 remain 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 all.

Read ASIC's report: Buying add-on insurance in car yards: Why it can be hard to say no, which analysed the experience of consumers who are sold add-on insurance by car dealers.

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 PDS. If you are going to make a claim it's best to lodge it as soon as possible.

Cancelling a policy

If you want to cancel a policy you can do so at any time.

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 choose to cancel a policy 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.

To cancel a policy, contact the insurer directly. Details about how to cancel will be in your policy's PDS.

Complaining about a policy

If your insurer rejects your claim, or you wish to make a complaint you should firstly contact their internal dispute resolution department.

If your insurer rejects your claim, your complaint remains unresolved for 45 days, or it is not resolved to your satisfaction, you can lodge a dispute with the Financial Ombudsman Service online or by calling 1800 367 287.

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.


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Last updated: 15 Sep 2016