Consumer credit insurance
Consumer credit insurance (or CCI) is insurance that covers you if something happens that affects your capacity to meet the payments on your loan. CCI usually covers three types of risks:
- death
- sickness or accident
- or unemployment.
If, for example, you have an accident and can't work for three months, the insurance will make the repayments during this period.
CCI is usually offered when you take out the loan, and the premium is included in the amount you borrow.
Do you really understand what insurance you are being offered?
You went to the lender to arrange a loan and weren't really thinking about taking out insurance. It can sound like a good idea to be covered so that your loan will be paid if something happens to you. But make sure you understand exactly what the insurance covers and how much it costs.
After you are properly informed about the features and price of the insurance you can then ask yourself more questions to decide if you really need it.
If you're not sure what the insurance is for or how it works you may be better off not buying it or asking the salesperson to explain it to you in more detail.
Does the insurance meet your needs?
The same CCI policy is offered to all borrowers. This means that it is not specifically adjusted or designed to meet your needs. For some borrowers, this can mean that the policy has some surprising exclusions or limitations.
For example, you may be working on a short-term contract or in seasonal employment, such as fruit picking. If you become unemployed because your contract expires or the season ends, the policy may exclude any claim, even though you may have assumed you were covered when you took it out.
Or you may not need life insurance, if you are a young single person with no dependants or if you already have sufficient life cover through your superannuation fund.
Find out about life insurance
Do you really need this particular cover/policy?
You may decide that you do need cover in case you become sick or have an accident, or if you die. If so, you may be better off arranging a policy that provides more comprehensive cover than a CCI policy.
CCI policies only meet repayments under the loan. They also can have broad exclusions when you are sick or die because of 'a pre-existing condition'. Some policies define 'a pre-existing condition' as anything you have ever seen a doctor about.
The CCI policy also only meets the repayments that fall due under the contract while you are off work. If you become sick, for example, when there are only a few months left on your loan, the policy will only pay those last two or three instalments.
Did you know you can be paying a higher price for the insurance?
Generally, the commissions paid to people selling CCI are higher than for other life insurance products. For example, up to 20% of the premium could be paid as commission.
In 2004 ASIC compared the cost of life cover of $50,000 under a CCI policy with cover under a term life policy. We found that CCI policies were 2 to 4 times more expensive than the term life policy. The difference in price will be increased even further according to the interest rate charged on the CCI premium.
Can you afford the higher repayments?
You may think that it is not too hard to pay for the insurance as you don't have to pay any money upfront, and you can pay the premium over time, through a small part of each repayment. This can make the cost of the insurance seem relatively small. However, if you are on a tight budget, it could make a difference.
You can always ask the salesperson to tell you what the repayments under the loan would be both with the insurance and without it, so you can make an informed decision.
Or you may want to consider not having the insurance but still having higher repayments. If you do this, you can pay the loan off quicker and pay less interest overall.
FIDO Website: Printed 09/03/2010
