Buying insurance extras from a car
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.
Add-on insurance report
Subscribe to ASIC View podcast via iTunes or PodBean.
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.
MoneySmart Cars app
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
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
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
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
life insurance, when you die your payout will go to your
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
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
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.
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
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 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 on this type of cover.
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
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
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 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
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
- Pay out - Will the payout be higher than your
- 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
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
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
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.
Last updated: 01 Nov 2016