Add-on insurance

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 it. 

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.

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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 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.

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 $130 million to customers who were sold these products unfairly.

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 insurers.

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.

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.

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.

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.

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 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.

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 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: 07 Aug 2019