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 or motorbike, 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?

Add-on insurance products are sold by car dealers when you buy a new or used vehicle. They cover things related to the car (like a breakdown or damage to the tyres and rims) or to your loan (such as if you are unable to pay it). 

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 talk about the sale of add-on insurance policies through car dealers and how the market is failing consumers.

Interviewer: Hello and welcome to ASIC view, the official podcast of the Australian Securities and Investments Commission. On today's episode we'll be discussing ASIC's review into the sale of add-on general insurance policies through car dealers.

Joining me to discuss the review is ASIC Deputy Chairman, Peter Kell. Peter, thank you very much for your time.

Peter: Happy to be here.

Interviewer: What do we mean at ASIC when we say add-on insurance?

Peter: These are insurance products that are sold to consumers when they purchase a new or used car.

They're the sort of extras that you sometimes are offered and they cover risks relating to the car itself, such as tyre and rim insurance, which covers you for the cost of repairing or replacing tyres.

Or they relate to the loan that the consumer takes out to purchase the car, such as consumer credit insurance, which covers you if you have difficulty making loan repayments because you've become sick.

Interviewer: So these are things, someone's buying a car, it's a big purchase and they're looking for extra bits of security and these are the sorts of products they might buy when they're doing that?

Peter: Well I think it's often the case of they're not looking for these extra products but rather after they've bought a car and maybe taken out a loan to help them buy the car, they have these extra products pushed onto them. And in some cases you can end up with four or five additional insurance products - consumer credit insurance, gap insurance, tyre and rim, mechanical breakdown insurance. These are the financial products that can end up costing you a lot of money before you even realise what you're getting into.

Interviewer: So how did ASIC conduct this review into add-on insurance?

Peter: We looked at seven general insurers, that make up more than 90% of this market - the market for add-on insurance products sold through car dealerships. We got a lot of detailed data about the way these products operate for three years - 2013,2014 and 2015.

Interviewer: And, as an overview what did the review find?

Peter: Well I'm afraid the results of our review are to put it bluntly, appalling. This is a market that is failing consumers. We found that in aggregate, consumers paid around $1.6 billion in premiums over the period we looked at, but received only around $144 million in successful insurance claims. That represents a very low claims payout of around 9%. And for some of the major add-on products, such as consumer credit insurance, the payout was even less, representing around five cents in claims paid for every dollar that you've paid in premiums.

Interviewer: So just to put that in context, how does that compare to other more common types of insurance like basic car insurance?

Peter: It's not necessarily a straight forward comparison, but to give you a sense, your usual car insurance has a payout ratio of about 85%, home insurance around 55%, travel insurance around 44%. In other words, they're all considerably higher than what we're seeing here, where the amount collected in premiums wildly exceeds what people end up receiving in claims on average.

Interviewer: The percentage, as you say, of claims is single figures. That's the main finding of the review. What else did the review find in its work?

Peter: Well, while consumers received very little benefit, car dealers earned $602 million in commissions over that period, that's more than four times the amount consumers received in claims and some of the commissions paid to car dealers to sell the product were as high as 79%.

We also found that payment for these insurance products is often packaged, or commonly packaged into the consumer's car loan as a single upfront payment. Now what that means is it not only increases the cost of the product as part of that amount that you've got to pay at the start, but it means that you're paying interest on your premium as well, because it's part of the loan.

We found that consumers are often unaware that they even have the policy when it's paid upfront as a single premium and in some cases it means that the total amount that the consumer is paying is more than they will ever receive or could ever receive if they made a claim. That's junk insurance.

We also found high pressure selling because of the high commission payments, which means that it's very difficult for consumers to understand what they're getting. These are often complex products, a lot of poorly designed products that are clearly not being sold with the consumers interests in mind. It is, as I said, a market that is failing consumers.

Interviewer: You've identified some fairly serious concerns here, what is ASIC doing to try and change this behaviour or fix these concerns?

Peter: Well the market has to change. It has to change dramatically and we're putting general insurers on notice, the general insurers in this market, that they need to significantly improve consumer outcomes or they're going to face further regulatory action.

So at least four broad areas need to be addressed. We want to see a significant reduction in the amount of commissions paid to anyone who sells add-on insurance through car dealers, to reduce that conflict of interest in high pressure sales.

We want to see very significant improvements in the value offered by these products. They're too expensive given the level of cover they actually offer and they're poorly designed. That needs to change, that needs to change now.

We want insurers to stop selling the products through a single upfront premium. Too often, that simply results in a situation that is a rip-off for the consumer.

We are also going to ensure that insurers who have provided policies that are inappropriate for the customer provide refunds. So for example, where a policy has been sold to a consumer who was never eligible to claim under the policy, that's unacceptable. That is a situation where we are going to look for refunds.

We're also going to be making sure that insurers provide ASIC with ongoing data and information about prices and premiums and claims, so that we can closely monitor how this industry is tracking over time.

I will say that the industry has indicated that it recognises that some reforms are necessary and it's already looking at implementing a 20% cap on commissions. That's a positive start but we're going to need to see a lot more.

Interviewer: If, hypothetically, you didn't see a lot more and these problems continued can ASIC ban these sorts of products altogether? Is that an option that ASIC would ever explore?

Peter: We will certainly look at all options that we have to deliver better outcomes. If that means we've got to take enforcement action, for example, if products have been sold in a way that's misleading, we will very much have that on the table.

It's also interesting that the financial system enquiry, the recent financial system enquiry did recommend that ASIC be given product intervention powers and also that the responsibilities of product manufacturers like insurers, that those responsibilities be lifted and improved. If those reforms were introduced, they would also help ensure better outcomes in this market.

Interviewer: So if I was a consumer who had one of these policies, what can I do if I've got concerns, that I have as you say, junk insurance?

Peter: Well, you may want to consider for a start, whether you really need the policies that you've been sold. Ask yourself, check how much you've paid and what is covered, and if you find out for example that you're not covered for what you expected, or even worse, you're not even eligible to claim, then ask for a full refund for the insurer and if you don't get a satisfactory answer, well there's a Financial Ombudsman Service to go to.

It's also a situation where you may want to consider contacting the Consumer Action Law Centre who are concerned as well around the sale of these sorts of products.

Interviewer: And they have a website, that people can visit if they are concerned. Peter, thank you very much for your time this afternoon.

Peter: Thank you.

Interviewer: And we'll be back with more episodes of the ASIC podcast very shortly. Thank you very much for listening.

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Types of add-on insurance cover

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 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

cost of life insurance infographic 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.

Read ASIC's report, The sale of life insurance by car dealers: Taking consumers for a ride, to see 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'), 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 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 get 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.

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 that.

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.

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.

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:

  • Commissions - 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.
  • 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.
  • How you're charged - 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.
  • 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 on premiums.
  • 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 for.
  • 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.

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 insurance extras you do and don't need.
  • 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 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.

Refunds for unfair sales of add-on insurance

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 $120 million to customers who were sold these products unfairly.

For information, and to check if you're eligible for these refunds, visit our webpages:

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 possible.

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 PDS.

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 931 678. 

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 warranty provider. 

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.

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Last updated: 10 Dec 2018