Get to grips with credit life cover

Although credit life cover plays a very important role in protecting consumers who have taken on debt, not enough has been done to make consumers aware of their rights.

Gerhard Joubert, CEO of the Life Offices Association, says consumers often don’t benefit fully from the protection and peace of mind that credit life products are meant to offer because of a lack of understanding of financial services and products, specifically credit life cover.

He says probably the most important consideration for someone taking on debt is whether to buy credit life cover or whether to cede an existing life policy. ‘Consumers often don’t realise that they are not obliged to take credit life cover if their existing life and disability policies provide sufficient cover.”

Many people do not realise that credit life cover is generally also more expensive than regular life cover because of its short-term nature, which means that limited underwriting takes place. However, credit life policies are probably the easiest and most convenient way of obtaining life cover if you are a healthy individual, since this type of cover does not require lengthy medical examinations and application forms.

It is therefore important, he says, that you consider your existing life and disability cover when taking on debt. It may also be in your interest to get advice from a financial adviser and take out a normal life policy that is geared to cover you over the long-term, instead of opting for credit life cover.

‘If, for example, you have enough life and disability cover to repay all your debts as well as provide for your family over the long term, then you should not feel obliged to taking out additional cover.

‘You need to understand, though, that the credit provider may require that you cede your existing policy to them to secure the debt. Should something happen to you, the life insurance company will first settle your debt and then pay your beneficiaries what is left.”

Joubert also points out that because you are required to cede the policy, you will not be able to finance two purchases against the same policy.

If, however, you do not have sufficient life cover, it is in your interest to take out credit life cover to protect you and your family. But remember, you are entitled to shop around for this cover and are not obliged to buy the option provided by the credit provider.

What is credit life insurance?

Joubert says credit life insurance generally provides you with both life and disability cover and is a product that you purchase when you buy something on credit (you incur debt to finance your purchase) in order to cover you for the loan if you die or become disabled.

Also referred to as ‘credit protection” or ‘instalment protection”, credit life cover is sold as part of the loan or credit agreement. Credit life cover is taken out for the period during which you are in debt. As soon as your debt is repaid, your cover ends together with your premiums.

Joubert explains that some credit life insurance products even include cover for critical illnesses such as cancer or even retrenchment.

‘Credit life insurance ends when your debt is repaid as this insurance covers one debt only. Your other life insurance policies on the other hand are aimed at providing for you and your family over the long-term should you die or become disabled.”

Who needs credit life assurance?

When you enter into a major financial commitment such as buying a house, financing a new car, buying electronic equipment on credit, taking out a loan for your child’s education, or going into overdraft to fund an overseas trip, it is important to ensure that you have sufficient life and disability cover to protect you and your family should something unforeseen happen to you that prevents you from being able to repay your debt. This could include death, disability, suffering a heart attack or becoming retrenched.

Not only does this cover protect the credit provider, but it also provides you with the peace of mind that you or your family are not saddled with debt that you are suddenly unable to repay.

While the credit provider can always resort to repossessing your purchase to cover the debt, or even worse get a court order that allows them to sell some of your belongings, you and your family may not be able to access enough funding to cover outstanding repayments.

How is credit life assurance sold?

Credit life cover is usually sold by the credit provider if you do not have sufficient life cover when taking on debt.

Joubert points out that you will generally not receive financial advice when taking out credit life since the intermediaries selling the cover are usually not qualified financial advisers.

‘Therefore, if you are in need of financial advice, or if you are not sure whether you need to take out credit life cover, it is important that you first check with your financial adviser.”

Many banks, motor-vehicle financing companies, furniture retailers and micro lending institutions have links with life-insurance companies and are therefore able to offer products specifically designed for the typical needs of their target market.

As a result, the credit life-insurance premiums can be integrated into the loan, and become part of the overall repayment schedule.

In terms of the National Credit Act, which came into full effect at the beginning of June this year, credit life-insurance single premiums can no longer be financed as part of the loan. You therefore have to pay monthly premiums in addition to your debt repayments, or annual premiums in the case of mortgage cover.

Joubert says since your insurance premiums for most debt are therefore no longer paid in advance, you need to make sure that you continue paying your credit life premiums, even if you default on your debt repayments. The credit provider may agree to a grace period, but your insurance cover lapses as soon as you skip a premium.

What you need to be aware of

Joubert says because the credit life insurance cover usually forms part of the purchase agreement, consumers are often not aware that they have purchased this cover.

He says while the life industry is currently addressing important issues such as disclosure in the consumer credit insurance market, consumers need to ask questions about credit life insurance when taking on debt.

‘The excitement of buying a new car or fridge may distract your from the financing agreement and any possible credit life-insurance contract that is entered into at that point in time. Often people then pay too little attention to the declarations and documents they sign and may end up being unaware of the benefits they are entitled to.”

Joubert says one of the problem areas currently being addressed by the LOA is the fact that people often do not know that they have life and disability cover when something happens to them. Even worse, he says, often their families are not aware of this cover and therefore fail to claim the benefits.

He says the current requirement is that any claims must be made within three months of the event that is covered by the policy. Often families only discover the existence of credit life-insurance cover much later.

Also, the way that credit life assurance is sold often only requires a declaration of health to be signed, stating that you are in good health and that no pre-existing conditions will be covered.

Joubert warns that it is therefore vital that you declare all existing medical conditions before taking out this cover and to familiarise yourself with the exclusions (conditions that will not be covered by the policy). He says exclusion periods of up to 12 months generally apply to these policies. Therefore if you die of cancer and the condition was diagnosed before you took out the policy, you will not be covered.

‘The LOA is currently investigating such problems in the credit life industry and we are looking at ways of making these products more consumer friendly and adding consumer protection measures,” says Joubert.

You are entitled to the following information

By law you can only be sold a credit life policy if you are provided with the following information in writing:

Tips on how to protect yourself when buying credit life cover