Are car insurance add-ons really that beneficial?

Consumer NZ is warning people to stay vigilant when it comes to choosing insurance add-ons when buying a car.

Add-on insurance includes policies like mechanical breakdown insurance (MBI), guaranteed asset protection (GAP), credit contract indemnity (CCI), and payment protection insurance (PPI). 

These are sold as protection for the consumer if they are unable to pay off a loan or their new car breaks down.

However, between 2018 and 2020, New Zealanders paid approximately $442 million in premiums for add-on insurances, whereas only $128 million was ever paid out in claims.

“There are so many exclusions and conditions on these insurance products, it’s incredibly easy for a consumer to get hoodwinked into paying for a policy that provides very little protection,” said Consumer NZ Chief Executive Jon Duffy.

It was also added that MBI policies don’t provide much more cover than the Consumer Guarantees Act, hence Duffy’s recommendation for consumers to consider whether they really need it.

“Under the CGA, if you buy a vehicle which isn’t of acceptable quality, the dealer is required to sort it out. Investing in a pre-purchase inspection and regular car servicing could be a better investment.”

With regard to CCI and PPI, these policies are designed to cover payments which can’t be made due to sickness, hospitalisation, an accident, redundancy, bankruptcy, or death.

Consumer NZ says three out of four insurers will only pay redundancy cover after 28 to 30 consecutive calendar days of redundancy.

It also mentions that if you need to claim because of an accident, the cover generally kicks in after five or seven days in hospital. However, the average stay in hospital for acute injuries is just two and a half days.

“A lot of New Zealanders have sick leave, and if you can’t work because of an accident, ACC covers 80 per cent of your income,” Duffy said.

“Before taking on a CCI or PPI policy, we encourage consumers to weigh up the benefits versus the costs. You may find you don’t need any add-on insurance cover at all.”

During 2020, car dealers earned on average between $304 and $636 in commission from each add-on insurance sale, according to the Commerce Commission’s Motor Vehicle Financing and Add-ons Review (2021).

In most cases, car dealers set the retail price and commission for these add-on products.

“We think add-on insurance is a nice little earner for car dealers and insurers, but a total rip-off for consumers,” Duffy said.

During the Commission’s review, it found that dealers weren’t making their customers aware of what they were buying.

Approximately 13 out of 62 customers didn’t understand what insurance add-on they had bought, eight weren’t even aware they had purchased an add-on, and 13 thought the add-on was a compulsory condition of getting car finance.

Consumers must be made to understand what they are purchasing under the Credit Contracts and Consumer Finance Act (CCCFA), while the Fair Trading Act (FDA) prohibits dealers and lenders from making false or misleading claims.

With that being said, Kiwis must stay vigilant of any insurance add-ons they may come across when buying a car and really consider if they are of any benefit to them.