Often when you apply for a credit card or take out a loan, tacked onto the finance agreement is insurance that promises to make the repayments if you become ill or are made redundant. But will it?
Payment protection insurance (PPI) is beneficial for people living pay cheque to pay cheque, says Rob Collins, general manager of credit union NZCU Auckland.
Credit unions are not-for-profits and were created to have their customers' best interests at heart, which isn't always the case for other organisations selling this type of insurance.
When it works and your loan repayments are covered long enough to get you back on your financial feet. But too many Kiwis find they've been paying money for nothing because they don't qualify to claim.
When sold by car yards, retailers and banks, this type of insurance can be a cash cow, with consumers paying what could be considered excessive commissions and good profit margins.
At car yards, the business gets commission and, sadly, the incentive can skew sales people's views of what's right and wrong. Too often it's added to the loan automatically via a check box without sufficient questioning to determine if the buyer qualifies. If they work part time, are unemployed or retired there may be no cover.
Another nasty sting is that the entire premium is added up front rather than monthly. Because the borrower typically doesn't have the money to pay up front it's lumped in with the loan and with interest charged on the premium at the same rate as the car or other borrowing. This is a real boon for the lenders, says Collins.
If borrowers repay early they may only get a small refund or none at all, says Collins.
"What really rarks me up with this is that if the borrower repays the loan early, the rebate is minuscule [and] a lot of finance companies don't pay back unless they're asked."
The Citizens Advice Bureau cited the example in one of its submissions of a client who paid $2000 in insurance cover on a $5000 loan from a finance company.
The Commerce Commission pointed out in a submission on responsible lending that it had seen premiums for credit-related insurance costing up to $1500 on loans of $12,000 to $14,000. Had the person needed to claim for unemployment or illness the pay-out provided by the policy was three months' scheduled repayments, which was less than the cost of the premium.
The Commission noted that many people buying this type of insurance sometimes weren't even aware they were buying insurance with their loan.
PPI has had a bad rap in the UK over the past decade and in Australia more recently, where a number of financial institutions have been behaving very badly, a Royal Commission into Banking has found.
Over the ditch, the banks have stopped selling PPI-type policies, in part because of the Royal Commission.
The ASB has stopped selling them in New Zealand.
PPI has come under the microscope here three times in the past few years.
In 2013, the Ministry of Business, Innovation and Employment (MBIE) called for submissions for a review of the Credit Contracts and Consumer Finance Act (CCCFA).
The following year a discussion on the Responsible Lending Code was had.
This year, the Government's Insurance Contract Law Review is underway.
Despite all these reviews PPI is still lightly regulated, with some observers using the words "Wild West" to describe practices. There are hopes that this review will help iron out the issues and give consumers a better deal.
Before purchasing PPI, be wary. Find out how much you're being charged, if you need the insurance and it you qualify to claim.
Be aware that under the CCCFA the insurance can't be unreasonable, must be disclosed, and provide a proportionate rebate if you cancel or repay the loan.