Life insurance cover in CCI products

ASIC has released a report “The sale of life insurance through car dealers: Taking consumers for a ride” (Report 471) which focuses on the life insurance cover in CCI products sold through car yards on credit arranged though the dealership, which commonly provides a lump-sum payment of the outstanding loan balance on the death of the insured.

The report analyses the premiums, product design, claim outcomes and sale of car dealer CCI life insurance.

Typically with such CCI:
(a) the life insurance component is bundled as an option under a CCI product, and provides a payout to meets the consumer’s liability under their car loan if they should die;
(b) either the car dealer or a related finance broker arranges finance for the purchase of the vehicle, and also acts as an intermediary between the consumer and the life insurer; and
(c) the life insurance is offered to the consumer as one of a number of add-on products after they have decided to purchase a car.

As the report title suggests, ASIC’s review found that car yard life insurance provides poor value for consumers.

ASIC concluded found that this market segment is characterised by:
(a) excessive prices relative to other life insurance products—consumers can pay more for car yard life insurance than if they bought either similar insurance though another distribution channel, such as an authorised deposit-taking institution (ADI), or cover under a term life policy;
(b) low claim payouts relative to premiums—ASIC found that, across all car yard life insurance products over a five-year period, the gross amount paid in claims was $6 million, or only 6.6% of gross premiums of just over $90 million;
(c) upfront payment of the premium as a lump sum—premiums are usually paid as a single sum funded by the consumer borrowing more from the lender; the consumer therefore incurs interest charges that increase the cost and reduce the value of the product; and
(d) high commissions—car dealers were earning higher commissions for business-use customers (up to 50% of the premium, compared to a maximum of 20% for personal-use car yard life insurance).

ASIC is currently conducting further work that analyses the range of add-on products offered by general insurers (such as CCI products, gap insurance and tyre and rim insurance), and the extent to which they provide value to consumers.

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