What is consumer credit insurance or personal loan protection insurance?

If you are concerned you may be unable to make personal loan repayments in the future, you might be considering consumer credit insurance. We explain more about it.

A personal loan can potentially assist you if you need a boost to your finances to help with achieving a goal such as buying a car or consolidating some debts. But loans can bring fees, and usually require you to pay off the amount owed within specific timeframes, in addition to interest. Plus, if you miss repayments, it can impact your credit score.

You have a variety of options if you are unable meet loan obligations due to reasons beyond your control. For example, you might decide to apply to your lender for a hardship variation. You can seek professional advice from a financial counsellor, or a financial adviser.

Consumer credit insurance (CCI), also known as personal loan protection insurance, is another option you might consider in advance of such a situation, but there are some important caveats and risks to be aware of. The Australian Securities and Investments Commission (ASIC) has been heavily critical of this type of insurance. At the time of writing, major banks are facing class actions on behalf of millions of customers.

What is consumer credit insurance?

Consumer credit insurance (CCI) or personal loan protection insurance can help cover the costs of your loan repayments when unexpected circumstances occur, such as being unable to work due to illness or injury. This insurance is optional and can typically be purchased either when you apply for a personal loan or after the policy commences.

ASIC has been critical of this type of insurance. It has been described as a low-value product, with criticisms from the regulator including that it has been sold to customers “without their knowledge or consent”, with “pressure tactics and harassment” even being used, along with “misleading representations” to induce purchasing.

What does personal loan protection insurance cover?

Depending on the policy you select and your personal circumstances, personal loan protection insurance may provide cover for serious illness or accidental injury, involuntary unemployment and loss of life. Check your policy to see what waiting periods and eligibility criteria apply to claim on benefits. Many Australians have been sold this type of insurance but are unable to claim on it, and the Consumer Action Law Centre has a tool called Demand a Refund that has helped customers who are seeking payments for CCI and similar products.

Is personal loan protection insurance different to income protection?

Income protection insurance is designed to pay out a benefit if you’re unable to work for a period of time due to injury or illness. The benefit provided can generally be used to pay for groceries, bills or any other expenses.

Personal loan protection insurance is designed to assist specifically with loan repayments, not with other expenses. In most cases, the financial assistance provided by loan protection insurance is given directly to the lender, not to the borrower. Income protection insurance may be accessible directly, via a financial adviser or through your super account, whereas personal loan insurance is only available for purchase directly from an insurer or your loan provider.

What should I consider with personal loan protection insurance?

Whether or not you want to consider personal loan protection insurance is a personal choice. Considering ongoing criticism about this insurance, it may be a good idea to seek  professional financial advice to support your decision making. Here are four general questions you may like to ask before considering personal loan protection insurance:

1. Are you eligible?
2. Is it in your best interest personally?
3. Does it represent value for money?
4. May you already have coverage with other insurance?

Separately, it may be the case that you have been sold this type of insurance previously as part of a loan without realising it. If you are concerned, you can visit the Consumer Action Law Centre’s Demand a Refund website for tips on next steps.

1. Are you eligible?

Some providers may require you to meet extensive eligibility criteria to qualify for this type of insurance. Criteria may be around your age, the type of employment you’re in and your residency details, as well as extra requirements for those asking for insurance for large loan amounts. Some institutions may also only insure loans if they are the loan provider for the same customer. Check with your provider to see if you qualify. There are various potential exclusions to be aware of when it comes to personal loan protection insurance. Depending on your policy, these may include:

• Being employed on a seasonal or fixed-term contract basis
• Becoming unfit for work due to a pre-existing medical condition
• Working less than a certain number of hours per week at the time your policy commences
• Quitting your job, retiring or accepting a voluntary redundancy
• If sickness or injury occurs or if you take your life within a certain amount of days of your policy commencing
• Self-inflicted injury
• War-related claims
• Pregnancy and childbirth

If you have a pre-existing condition that could make you unfit for work for a period of time, check to see if it is covered under your policy. If it is excluded, you will not be able to claim for this condition. Thoroughly read the terms, conditions and exclusions of a potential policy before committing, and consider asking your insurer if you have questions.

2. Is it in your best interest personally?

ASIC’s Moneysmart says consumers may be offered consumer credit insurance, or personal loan protection insurance, when applying for a loan, but to be aware “it offers poor value for money and you don’t have to buy it”. Moneysmart explains that sales staff can get a commission if you purchase this type of insurance, and you should take time to think about whether you need it before going ahead. An earlier ASIC review has also revealed that this type of insurance can offer very poor value for consumers.

More recently, in April 2021, ASIC commenced court proceedings against Westpac, alleging it had mis-sold this type of insurance to customers who hadn’t asked for it.

Separate to whether or not personal loan protection insurance might be right for you, if you are concerned about your capacity to repay a loan, it may be a good idea to seek professional advice. Canstar has some related articles on this topic, including about who to contact if you may want free financial counselling, as well as factors to consider before engaging an independent financial adviser.

3. Does it represent value for money?

It’s important to consider whether the premium you pay for this insurance provides you with value for money. For every dollar paid in premiums for personal loan protection insurance, or CCI, less than 10 cents are paid out in claims, according to figures published by the ABC. Comparatively, car insurance pays out almost 89 cents for every dollar paid in premiums.

ASIC says there are some concerns around payouts for this insurance that you should be aware of. These include the fact that in most cases the money is not paid to you, but is paid directly to the credit or loan provider; and that some payments are made in instalments. The payments can stop after a period of time, leaving you to make the repayments after that time. Your payout amount is also often calculated according to the amount you owe at the time of the insured event, not when you lodge the claim. This means any extra added to your loan in the meantime may not be covered by the policy.

4. May you already have coverage with other insurance?

Check to see if you need this protection. You might have similar coverage elsewhere, such as through income protection insurance or life insurance that will cover you and your loved ones sufficiently in different circumstances.

What are some potential benefits with personal loan protection insurance?

Personal loan protection insurance may give you greater peace of mind about balancing and juggling your finances. If you can no longer work, this insurance may provide a form of financial protection to assist you and your family with loan repayments. It may also assist with paying the remainder of your loan if you unexpectedly pass away. As missing personal loan repayments can negatively impact your credit score, this type of insurance may potentially help you maintain your credit rating, should the unexpected occur.

What does personal loan protection insurance cost?

Premiums for loan protection insurance are calculated based on a range of factors. These include:

• The type of cover and features you choose. Whether it’s cover for life, accident and sickness, or involuntary unemployment, each option or combination of options will carry different costs. The features chosen within each type of cover may also influence the cost.
• Your loan amount and term. The size and term of your loan may be used to calculate the premium.
• Single or joint policy. Some providers may offer the option of taking out a single policy or a joint policy. The premium may change depending on the policy type you choose.
• Repayment size. The total premium will differ depending on the amount of your monthly repayments.
• Your age. Your age at the start date of your policy may be taken into consideration when calculating your premium. Check with your provider.

It is a good idea to compare quotes from several providers to find the right policy for your needs and budget. Further factors may also be considered by providers in calculating your policy cost. Remember too that earlier ASIC research has revealed many providers may not be offering a product that represents good value for money, so doing your research is particularly important.

Are there waiting periods with personal loan protection insurance?

Depending on the policy you choose, there may be a waiting period from when you take out the policy to when you can claim. There may also be a waiting period from when you become ill, injured, or out of work until you can claim. Some products may also include a cooling-off period, which is the amount of time you have to cancel your policy and recover any premiums you have paid. If you cancel after the cooling-off period, your premiums may not be refunded. Check your policy’s Product Disclosure Statement (PDS) for details.

How can I get personal loan protection insurance?

Loan protection insurance is often made available from your loan provider, such as a bank or credit union, or can sometimes be purchased directly from an insurer. Before you purchase personal loan protection insurance, consider whether this approach is right for you and if it will be cost-effective. Research your options carefully and read through the terms, conditions and exclusions in the PDS of a policy before proceeding.

Original author: Elise Donaldson.

Main image source: ESB Professional/Shutterstock.com