Is there junk in your trunk?
Once you have done all your research, negotiated a good deal and set your heart on that shiny new car, you usually just want to get your hands on it and drive off into the sunset.
Salespeople count on this and try to maximise their profits by selling you junk insurance that can be completely useless to you but can pay them a commission of between 65% and 90% of your premium.
For selling you tyre and rim insurance, car dealers can earn:
- 75% of your premium from Swann, a brand of leading insurer IAG (50% commission plus a possible volume-based commission of 25%)
- 90% of your premium from Avea (65% of net premium after stamp duty and other government charges plus a possible volume-based bonus of up to 25%)
An ASIC report tabled in September 2016 calculated the payout on these policies at a measly 9% – $1.6 billion paid in premiums and a mere $144 million paid out in successful claims. By contrast, legitimate car insurance pays out about 85 cents for every dollar of premium paid. You can see why the insurers and their salespeople love these products!
Following the ASIC report, the Consumer Action Law Centre renewed its call for junk insurance customers to demand a refund.
What's "junk" car insurance?
If your car is a write-off, gap insurance can pay the balance if the benefit from your comprehensive car insurance is less than what you owe on your car loan.
Tyre and rim insurance
This covers the repair or replacement of your tyres – for example, if they are punctured, you have a blow-out or have driven over nails.
Extended warranty or mechanical breakdown insurance
This can cover you in case you have a breakdown or your car needs repairs.
Why are these policies a rip-off?
These insurance policies have lots of restrictions. For example:
- Tyre and rim insurance may not cover you for vandalism or if you take your car off-road.
- The maximum benefit under gap insurance may be less than your shortfall.
- Mechanical breakdown or warranty insurance providers can rely on their discretion to reject a claim. For example, they may not cover you for a fault that already existed before you took out the cover (even if you did not know about it). It can also exclude common problems such as issues with your battery, exhaust or brakes.
- Wear and tear and regular maintenance isn't covered for tyre and rim and breakdown insurance.
Do you need it?
In many cases, you're already covered for anything the insurance may offer.
- Gap insurance could be of no value to you, depending on the amount of your car loan and the value set for your car by your car insurer.
- Manufacturer's warranties, consumer guarantees under the Australian Consumer Law or your comprehensive car insurance may already cover you for most things that could go wrong with your car.
- Tyre manufacturers may already cover you against some accidental damage to your tyres. Also damage to a tyre, especially if it can get repaired, is usually not very costly so it could be hard to get your money's worth out of tyre and rim insurance. (Read our tyre buying guide for more.)
Be prepared for the hard sell and stick to your guns before signing on the dotted line.
"We see many people who say they never knew they bought this insurance," says David Leermakers, Senior Policy Officer from the Consumer Action Law Centre (CALC). "And many people can't explain what the products are or what they cover."
Remember, car dealers receive a large commission on these products, so whether or not they are in your best interest may be the last thing on their mind. Ask these questions:
- What is the full cost of the policy? If it's added to your loan interest payments could be considerable.
- What's covered?
- What's not covered?
Keep asking questions until you are sure about everything.
Never sign up on the day – sleep on it and shop around for a better deal.
Read our car buying guide for more tips on not getting caught up in sales hype.
Get a refund
CALC has released an online tool that helps you to get a refund for second-hand car warranties, gap insurance and consumer credit insurance.