Credit protection insurance sham

Credit protection insurance makes an easy dollar for lenders and insurers, but for consumers there are far smarter options.
 
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04.Victims of credit protection

Improper selling of credit insurance is rife. Some lenders promote it heavily and it can be difficult to get out of.

Katherine Lane, Principal Solicitor at the Consumer Credit Legal Centre NSW, has seen people who have been sold credit protection insurance with unemployment cover while being unemployed at the time. This cover only applies if you have been employed for a period of time before you become unemployed, so the cover was worthless for them.

In 2005, GE Money was investigated by the Australian Securities & Investments Commission (ASIC), which found it had:

  • Advised customers to take out credit protection covering their death in addition to a normal life insurance policy.
  • Routinely advised singles without dependants to take out life insurance.

Subsequently, GE Money gave ASIC an enforceable undertaking to change the sales practices employed by its Hallmark insurance businesses. However, in May 2008 ASIC took action when Hallmark failed to comply.

We have received further reports about problems with GE Money. Alison from Queensland took out an interest–free deal to buy a combination microwave. On her first statement she found a charge for credit protection insurance, even though at no time during the sale was this cover explained or even mentioned to her. Alison was forced to ring GE Money and cancel the cover.

Hard sell

When George called his bank to activate his new credit card it took much longer than usual. The consumer service officer used the time to try to sell him credit protection, which he declined.

However, a week later, George received a letter from his bank congratulating him for taking out cover. He soon discovered how difficult it was to get out of a contract to which he’d never agreed. He immediately called the bank to cancel but was told he had to send a letter including the certificate of insurance. The bank cancelled the contract after he sent the letter. CHOICE has since lodged a complaint with ASIC about George’s experience.

Problems with claims

Scott from Adelaide took out credit protection for a $10,000 personal loan to buy a motorbike and consolidate some debt. He paid a premium of about $1000.

When he lost his job, he rang his lender to make a claim but was only able to talk to the insurer after two further calls. He had to fill out a number of forms and needed a statement from his former employer, but was uncomfortable asking for it. He was told it would take two weeks to process the claim but his lender refused to suspend his repayments until the claim was processed. Scott gave up and asked his father for a loan instead.

Only about 1% of credit protection policyholders made a claim in the 12 months to June 2006 – far fewer than with other types of insurance. In the same period, about 12 out of every 100 credit protection claims were rejected, much more than most other types of insurance. The reason for this is very tight exclusions in the contract. “In general, the benefits of consumer credit insurance are weighted in favour of the lender,” says Ken Lockery, AMP Director Personal Wealth Protection.

 

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