The Credit Bill, which is currently being tabled before Parliament, has highlighted the practice of credit life insurance when purchasing a vehicle. The aim of this insurance is to pay out the outstanding debt on the vehicle should you die or are unable to make some of your repayments, either through disability or retrenchment.
The common practice is to sell the life cover as a single upfront premium, which is then added to your car finance. In fact, as it currently stands, a car dealership can only offer the single upfront premium cover because it does not have the facility to accept monthly debit orders. If you wish to make monthly premium payments, it has to be done either through the bank or another insurance company.
The Bill recommends that the practice of adding the upfront premium to the principle debt be disallowed. The insurance industry is arguing that it is detrimental to both the industry and the consumer.
The Bill makes an important point. On the face of it, it does not make financial sense to take out debt at a cost of at least 11% a year to buy life cover when you can purchase this cover on a monthly basis using your monthly cash flow.
However, the MD of Regent Life Assurance Company, Nazeer Hoosen, who made a presentation to Parliament, says there are massive cost savings as a result of paying an upfront single premium.
Because the premiums are secured there is no chance of lapses and the fact that it saves the company monthly administration costs means that, depending on the value of the loan, the consumer can save up to 300%.
Hoosen uses the example of taking out credit life insurance for a 60 month period on a R200 000 vehicle. If you pay the premium upfront the cost is R15 600 (effectively R260 a month). If, however, you choose a monthly payment you will pay R350 a month, which works out at R21 000 over the 60-month period.
However, when financing a car, you need to look at the option of credit life insurance very carefully as your individual circumstances will determine whether you need the insurance (it is important to understand that it is not compulsory) and whether to purchase an upfront premium (deleted annual) or monthly premium.
Firstly, if you already have life cover you may choose to top up your existing cover. You need to price the difference and to remember that most traditional life covers do not offer retrenchment cover.
If you don’t have life cover or don’t want your traditional life cover to go towards paying-off your finance debt, then you could consider a credit life insurance but, again, you need to do your homework and find the best options with the best cover.
Credit life insurance does not discriminate on age or require a medical examination. For example, Regent Life bases its premium on an average age of 40. This is great news for over 50s who smoke, but younger, healthier persons may find that it is cheaper to take out separate life cover that takes their risk factors into account.
For example, a 23-year-old non smoker would pay R140 a month for insurance that includes retrenchment cover. A 35-year-old would pay R218 a month, while a 60-year-old would pay R566. It would work out cheaper for someone under the age of 40 to take out a separate life policy with an added retrenchment cover than to take out credit life insurance. However, people older than 40 would find the credit life insurance a great deal cheaper.