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Why you should avoid life insurance sold at car dealers

Person in car looking worried at at life insurance documents offered by salesperson.

When you purchase a vehicle from a car dealer, you'll probably be offered a whole lot of extras. While an alarm system may be worth forking out extra for, one add-on you should avoid at all costs is life insurance.

Drawing on the results of an Australian Securities & Investment Commission (ASIC) investigation – which found customers who buy life insurance through car dealerships generally wind up with lemon policies – this guide will run through the pitfalls of agreeing to these policies and why you should politely decline. 

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Snapshot of ASIC’s findings

Let’s face it, thinking about what will happen to your loved ones when you die is a pretty macabre. However, it’s well worth the thought, as settling on a suitable life insurance policy could help your family out financially if unforeseen events mean you cannot look after them. Read our guide to gauging if you need life insurance if you're not 100% set on this cover.

That being said, it’s not the kind of decision you should be making in a car yard. And here’s why, according to research conducted by ASIC in 2016:

  • It’s too expensive. Aussies who buy personal use life insurance sold in car dealerships, also known as 'add-on life insurance' pay up to a whopping 50% more than similar policies which can be purchased elsewhere. Go figure.  
  • Payout rates are the lowest. When it comes to the crunch, your dependents are more likely to see their claims rejected. Often in the fine print there’ll be plenty of exclusions and very minimal cover which doesn’t suit everyone.  
  • There are high mark-ups for small business owners. If you’re a small business owner, don’t expect to get a good deal as you may be charged up to 80% more from a car dealership than an individual taking it out for 'personal-use'. 
  • It targets young people, who need it the least. ASIC also found among the number of policies sold via car yards, 11% were purchased by young people aged 18-21. This is a demographic generally with fewer or no dependents (and often holding life insurance via superannuation), and therefore a group for which standalone life insurance is less essential.
  • You’ll learn very little about the policy. It’s not easy to make other major financial decisions when you’re focused signing off on a big ticket item like a vehicle. ASIC found most people who agreed to add-on life insurance policies in car dealerships did’t learn much about the cover at the time. Some car buyers who ASIC interviewed said, in retrospect, they felt embarrassed that they didn’t know what they had signed up for. 

But of all the add-on life insurance flaws pointed out by ASIC, the following one would have to be up there as the worst…

  • Premiums get factored into car loan debt. Most dealerships offering add-on life insurance tie upfront premiums into the actual car loan package. So those who opt in get charged interest on top of a premium that’s already expensive to begin with.  

What’s ASIC doing about it?

In 2016, the consumer watchdog warned the life insurance industry to clean up its act or face disciplinary action. ASIC has called on insurance providers to address the high costs, poor value and poor claim outcomes that come part and parcel of the life insurance policies being sold at car dealers.

In 2019 and again in 2020, the regulator has sought consultation to intervene in the sale of add-on life insurance via car dealerships.

Did you know, that ASIC conducted a review into the life insurance industry as a whole? Check out our guide on what the ASIC life insurance review means.

Choosing the right life insurance for you

1. Know what to look for. Before you start comparing it’s a good idea to calculate how much your dependents rely on you financially, and what they’d need to survive on if you died prematurely. Doing this will help you determine how much life insurance you need.

2. Compare online. Shortlist policies with your preferred features, which may include pay on time discounts, advance payments or quick application features. Then you can kick off those enquiries and receive quotes.

3. Read the fine print. It’s always worth trawling through the fine print – you never know what could be hiding in there. Then once you’re happy, submit your application so you can put your mind and your family at ease.

Olivia Gee
Olivia Gee
Money writer

As a personal finance writer at Mozo, Olivia investigates insurance, banking and property. After completing a double degree in journalism and media and communications, Olivia became a lifestyle editor at Time Out Sydney and freelanced for notable publications such as Guardian Australia and SBS News. Now she is Mozo’s resident car insurance enthusiast, and is certified (ASIC RG146 Tier 2) to provide general advice in general insurance. She also creates audible finance adventures as co-host of Mozo’s podcast, The Finance Burrito.

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