Credit protection insurance rip-off

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

Grounds for refund?

Consumers could be owed to up to $70 million in refunds for the premiums they paid for bad value credit insurance, estimates the Consumer Action Law Centre (CALC). 

If you bought a car on finance or took out a loan or credit card, sneaky salespeople might have sold you credit protection insurance. 

This insurance has limitations that make it almost worthless. CALC thinks many consumers have enough legal grounds to get a refund.

Use the tool to demand your refund for credit insurance and other add-on insurance products.

Credit protection insurance explained

An insurance that seems cheap, convenient and promises to cover your loan repayments against potential disasters such as unemployment or sickness is really too good to be true. Credit protection insurance is a rip-off, and other options like life insurance and income protection insurance give you far better and cheaper cover.

Consumer credit insurance goes by a few names. It may be called:

  • loan protection insurance
  • mortgage protection insurance
  • credit card insurance
  • personal loan insurance.  

It usually covers your loan repayments in case of:

  • disablement – injury or sickness
  • unemployment
  • death.

If your claim is accepted, your debt or repayments are covered. However, there are plenty of hidden catches and traps.

Why is credit protection a rort?

According to ASIC there are big problems with the payouts if your claim is approved:

  • The money is not paid to you – it's paid directly to the lender.
  • Some payments are made in instalments which often stop after a set period of time – you'll have to make your own repayments after that.
  • Many policies don't cover you for the full amount of your outstanding debt. For example, consumer credit insurance policies sold with credit cards usually only pay out a percentage of the outstanding debt.

Other problems:

  • It's very expensive – expect to pay over $2000.
  • It might be useless to you – for example, if you're unemployed, working part-time, as a casual or are self-employed, the unemployment insurance may not cover you. If you've a pre-existing condition, you may not be covered for disablement or death caused by that condition.
  • It's very profitable for salespeople who usually receive a 20% commission of the premium you pay.
  • Insurers pay only 23 cents in the dollar in claims compared to the premiums collected – that's less than half of what's paid out on home insurance.

How much does credit protection insurance cost?

The premium depends on the type of loan and the lender.

Credit cards

For credit card insurance, for example, NAB charges 79c per $100 of your credit card balance, so if you have an average monthly balance of $5000, you pay an annual premium of $474. See the table below for how little cover NAB offers for this premium and how much more you could get for the same premium if you took out life insurance through your super fund.

Consumer credit insurance vs life insurance
Premium Credit insurance* Life insurance**
Annual premium ($) $474 $474
Life insurance benefit ($)
Disability benefit ($) $5000 $100,000
Income protection benefit ($) $750/month up to 18 mths $2000/month up to 24 mths
Unemployment benefit ($) $750/month up to 5000 Not covered
Critical illness benefit ($) $5000 Not covered

Table notes: *Credit insurance for a NAB credit card with a $5000 balance. **Life insurance for a 45-year-old professional with Australian Super. Premiums vary depending on your age, profession and super fund. 60-day waiting period for income protection insurance.

Personal loans

With a personal loan, it's more complicated, as the premiums depend on many variables, including the length and amount of the loan. ANZ gives these examples:

  • Jane: $5000 loan over three years with up to $5000 cover in case of death or disability – total cost $332.
  • Max: $10,000 loan over five years with up to $10,000 cover in case of death and disability – total cost $1108.
  • Sara: $14,000 loan over seven year with up to $14,000 cover for death and disability plus up to four months repayments in case of unemployment – total cost $6352

That's a lot of premium for a little bit of cover. And worse, the premium is usually added to the loan, so you pay interest on it and your minimum loan repayments increase, which makes it even more expensive.

What we found

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.

Alternatives to credit insurance are: