Credit life insurance - What you need to know
Most South Africans have some form of debt whether this is in the form of a home or car loan or smaller debts such as credit cards and personal loans.
Some credit providers make it compulsory to have credit life insurance which is an insurance policy that will cover your debts in the event that you pass away or experience a loss of income.
In fact, according to the National Credit Act, they are entitled to make credit life insurance a requirement and therefore you cannot refuse such cover if the lender requires it. That said if you have an existing policy that will cover the debt in question you can make use of it.
Perhaps you get injured on the job and can no longer work as a result of that you’re retrenched – what will happen to your bond, car loan, personal loan, credit cards, and even store accounts?
If you don’t have credit life insurance, you’re going to have a massive problem on your hands but, if you’re fortunate enough to have it in place, your payments will be covered.
What is credit life insurance?
Credit life insurance is a type of insurance plan that covers your debt payments in the event that you can no longer make the payments.
While most people think that credit life insurance will only activate if they pass away, they tend to try and refuse the cover when it’s offered by the various credit providers.
The truth is that credit life insurance also covers you if you become disabled, suffer from a critical illness, or lose your income. If you already have life cover in place, chances are your current debts are already covered and you may not require additional cover.
Is credit life insurance compulsory?
Credit life is compulsory for certain types of debts and certain lenders will not approve your credit application without it. That said, you are not required to use the in-house products proposed by a lender and are free to select any suitable provider and plan.
While you may feel frustrated that you have to pay an additional premium on top of the interest and fees that generally come along with loans, there’s a good reason for this requirement.
The reason is that, even if you pass away, get sick or lose your job, your repayments will still be due and payable. If you’ve passed away, this burden will fall onto your estate and your family will have to continue to make the payments.
If you’re the sole or primary breadwinner in your family, this will leave your family in a very difficult financial position. If you become disabled or ill and are not receiving an income, these debt repayments will simply add to the mountain of stress and difficulty you’re facing.
A credit life insurance plan will simply pay your instalments as required so that your family isn’t burdened by debt and, in the case of a loss of income, help you stay in the green when you need it most.
Maximum credit life insurance costs
When it comes to credit life insurance, providers must abide by the regulations which put a cap on how much you can be charged. For home loans, the cap is R2 per R1,000 owed and R4.50 per R1,000 for all other loans.
How long will you be covered?
This depends on your plan and the reason for your inability to make the repayments. Many banks provide 12-month cover on unsecured loans in the event that you lose your income. In the case of loss of income, it’s preferred that you make a claim before you miss your repayments but, some policies are more relaxed when it comes to this.
Credit life insurance typically offers:
- Death cover that will pay your full outstanding loan if you pass away
- Permanent disability cover that will also pay the full outstanding loan amount
- Temporary disability cover that pays your instalments until you recover or for a 12-month period
- Retrenchment cover pays instalments for 12 months or until you find another job
Credit life insurance versus life cover
Credit life insurance generally covers a specific debt, such as your home loan or vehicle finance. It does not payout a lump sum of cash as per your policy as is the case with life cover.
As mentioned if you have life cover, chances are you will not need additional coverage in the form of credit life insurance.
Credit life insurance isn’t typically underwritten, which means you won’t have to go through the medical checks that you do when taking out life cover.
This makes it ideal for individuals who are experiencing health problems, have pre-existing conditions, and are considered high risk due to their age, occupation, or lifestyle.
Not sure if you already have credit life insurance?
Some lenders actually include the cost of credit life insurance in the cost of credit automatically so, you may not even be aware of it but you may already have credit life insurance.
You can find out by reviewing your credit agreement which will specify whether this is included or not but if you’re having trouble figuring it out; you should contact your lender and ask.
Is credit life insurance worth it?
This will depend on the debt you’re covering as well as your personal financial situation but, generally yes, credit life insurance is worth it even if it protects the lender more than it protects you.
It’s fairly affordable since it’s calculated based on your loan amount and will help safeguard you and your family in the event that you cannot make your debt repayments. That said, as your loan decreases your credit life insurance premium will stay the same.
Credit life insurance, particularly with regard to disability and unemployment cover, will help overcome your debts when you’re at your most vulnerable, help you keep a roof over your head, keep your car, and prevent lenders from taking legal action against you to recover their money.