Consumer organisation Choice has come out with guns blazing against credit protection insurance, calling it a rip-off and a sham.

“There are about one million expensive and, in many cases, unsuitable credit protection policies,” Choice says in the March edition of its magazine.

“For most people, credit protection may not cover your needs and is usually more expensive than other insurance options.”

Choice compares the cost of credit protection (consumer credit) insurance – covering credit card and home/personal loan debt and repayments – with life and income protection products.

It concludes credit protection insurance is a “rort” because of the comparatively high cost, low incidence of claims by policyholders (1%), high claim rejection rate (12%) and low proportion of premium income returned to policyholders (15%).

“This makes it very profitable for insurers and lenders who usually receive a 20% commission,” Choice says. “Other types of insurance on average use 74% of premiums for claim payouts to policyholders.
 
“This type of insurance appears to be primarily about making money,” Choice spokesman Christopher Zinn told insuranceNEWS.com.au.

Two companies which provide credit protection insurance were approached by insuranceNEWS.com.au for comment. Both declined.