Credit insurance - check what you're covered for
NEXT time you apply for a personal loan, mortgage or credit card, there's a good chance you'll be offered what's termed 'consumer credit insurance'.
It's designed to help you repay the debt if you can no longer work due to illness or injury or if you lose your job or die. This type of insurance can be worthwhile but a recent industry review found there is significant room for improvement when it comes to the way claims are handled.
Consumer credit insurance (CCI) is marketed under a variety of product names. The common thread is that it's designed to provide policyholders with a payout if something happens that affects their ability to meet credit repayments - typically involuntary unemployment, sickness, injury or death.
For consumers, this type of cover calls for some thorough research. Recent research by the Australian Securities and Investments Commission (ASIC) into how CCI claims have been handled showed a very mixed bag of experiences among borrowers who took out CCI.
To be fair, some consumers had their claims dealt with promptly, and reported being relieved that they had this type of cover in place. Interestingly, the ASIC research confirmed that these policyholders tended to be the ones who had checked the fine print of the policy document.
Other consumers, who had paid for CCI, were shocked to find their claims were dismissed. This happened for a variety of reasons including the presence of a pre-existing medical condition, the consumer's age or because they were a contract worker or had been in casual employment, which was excluded by their policy.
Understandably many of these policy holders reported being upset about being sold a policy without being made aware of important policy exclusions and conditions that could - or did, apply directly to them.
These people made the simple mistake of assuming that because their credit provider offered them a CCI policy, they would be eligible to be covered by it. Sadly, it seems this isn't always the case.
I should point out that statistics from the Financial Ombudsman Service show almost 12% of claims made on CCI policies are denied. This is a high rate of denial compared to most other general insurance products, which generally see between 1-5% of claims denied.
The message for anyone being offered CCI is to take the time to consider whether this type of cover is right for you. And most importantly, read the policy document. In fact, I would urge you to do that with any type of insurance. The last thing you want with insurance is to be 'fine printed', and it does happen.
In particular, look at what events you'll be covered for, how much you'll pay in premiums, whether you are eligible for cover in the first place, and whether you have a pre-existing medical condition that could exclude you from making a claim.
Bear in mind, if you have income protection insurance in place, which I recommend to most people, you probably won't need insurance that applies for one particular type of debt.
The full report on CCI can be downloaded from the ASIC website at www.asic.gov.au.
Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.