Credit protection insurance sham

Credit protection insurance makes an easy dollar for lenders and insurers, but for consumers there are far smarter options.
Learn more


Toy house & car

In brief

  • Credit protection is a largely hidden insurance, which covers your debt and repayments if you die, become sick or lose your job.
  • CHOICE found credit protection insurance is disproportionately expensive compared with life insurance.

In this era of financial uncertainty, an insurance that at first glance seems cheap, convenient and promises to cover your loan repayments against potential disasters such as unemployment or sickness appears too good to be true. Unfortunately, CHOICE has found it really is. Our investigation concludes that credit protection insurance is a rip-off, as other options give you far better and cheaper cover.

Please note: this information was current as of March 2009 but is still a useful guide to today's market.

What is credit protection insurance?

Credit protection insurance (also called consumer credit insurance) covers your credit card, home loan or personal loan debt and repayments in the event of your death, terminal illness, disablement or unemployment. It is generally available with a mortgage, personal loan or credit card, is optional and in no way connected to mortgage insurance, which is usually compulsory if you have a home loan deposit of less than 20%.

It tends to be offered as a package, such as combined disablement and unemployment covers. If your claim is accepted, your debt is usually covered in the case of death or terminal illness and the repayments for disablement or unemployment. However, there are plenty of hidden catches and traps.

Why is credit protection a rort?

  • It’s very expensive: for a similar premium you can buy $500,000 life insurance or credit protection insurance worth only $2500. The life insurance policy would leave your family 200 times better off in the case of your death.
  • Only 1% of policyholders make a claim, compared with 13% of car insurance and 9% of sickness and accident insurance policyholders.
  • About 12 out of 100 claims are rejected, which is much higher than most other insurance options.
  • Only 15% of premiums income is returned in claims payouts to policyholders. This makes it very profitable for insurers and lenders who usually receive a 20% commission.
  • Other types of insurance on average use 74% of premiums for claim payouts to policyholders.

CHOICE verdict

There are about one million expensive and, in many cases, unsuitable credit protection policies. For most people, credit protection may not cover your needs and is usually more expensive than other insurance options. There are much smarter options to make sure you’re covered if something unexpected happens.

It is essential to have an emergency fund; if you have children or other dependants, think about how much money would be needed in the event of your death to cover their education and other needs. Usually the cheapest way to do this is to take out life insurance through your super fund. Also consider income protection insurance, trauma and total and permanent disability insurance, which cover you in the event of an illness, accident or disability.



Sign up to our free

Receive FREE email updates of our latest tests, consumer news and CHOICE marketing promotions.