Consumers are approached to purchase many different types of insurance. There is not only the usual life, car and household insurance products but also variations of these long term and short term insurance products. If you need insurance to cover any need – there is a good chance you will find it!! But do we understand these types of insurance products and do we need all of them?
In this Blog post we would like to discuss one of these types of insurance – credit life insurance and explain why it is important to understand the nature of this insurance product.
What is credit life insurance?
Credit life insurance has been created to provide cover to the consumer for a specific debt that he has incurred during his lifetime and to protect his dependents from having to pay for such debt. Credit life insurance takes care of any outstanding debt the deceased may leave behind. In other words, in the event of your death, the outstanding capital on a short or long term debt (such as on a car or home) will be paid out to the provider of the loan.
Credit Insurance was born at the end of nineteenth century, but it was mostly developed in Western Europe between the first and Second World Wars. During the 1990s, a concentration of the trade credit insurance market took place and three groups now account for over 85% of the global credit insurance market.
This insurance is often required by mortgagors and other lenders, with the special characteristic that the amount of the policy decreases proportionally, matching the loan balance at any given time; designed so that the loan will be paid off in full in the event of death. It is however not only payable in the event of death – Credit life insurance may also covers you in the event of becoming disabled, which leaves you medically unfit for work and unable to earn an income and settle your debt.
Characteristics of credit life insurance
A credit life insurance policy is best explained by focusing on the unique characteristics of such a policy. This policy
- will in the event of death of the policyholder, pay out the outstanding capital on a short or long term debt (such as on a car or home) to the provider of the loan;
- is a “decreasing sum assured product” which means that the pay- out amount decreases in direct correlation to the repayment the policyholder makes on the loan;
- includes occupation-based disablement cover as well as dread disease cover to protect the policyholder should he lose his ability to work;
- is valid for the whole loan contract period or outstanding period (if you start the life policy after you took your loan) or until a disablement, death or dread disease claim is made and paid out;
- Provides immediate cover
Pitfalls and warnings about credit life insurance
But why do we find so many financial governing bodies warning consumers of credit life insurance? The Ombudsman for short term insurance has recently warned consumers to be very alert when approached for this financial product, and not to be pressured into buying credit life insurance when signing a hire purchase agreement.
We would like to focus on the following aspects that consumers need to be aware of:
- When you buy goods such as cars and even furniture on credit, it is common for salespeople to offer you credit life insurance.
- This is a cover that is surprisingly easy to purchase – questions may appear to be simple, vague health questions without additional medical tests required.
- If you have a pre-existing condition, this might make you believe that this type of insurance is easier to qualify for than term life insurance.
- The insurance products offered by credit providers often do not meet consumers’ needs and can be more expensive than anticipated.
- Consumers have run into difficulty when submitting claims – the insurance provider only then starts their post-claim underwriting process. This means that the insurer will decide at that point if you actually qualify to receive a payout, even though you may have been paying premiums for years.
- Credit life insurance is often too expensive compared to the premiums for normal life insurance.
- Credit life insurance is often misunderstood and seen as normal life insurance – the dependents could be alarmed to find that it only covers a specific reduced debt and does not provide for children’s education and other needs.
Advice for the consumer
It is important to understand that there is nothing improper or wrong with credit life insurance – but attention is required to the specific product, the terms and conditions and the reputation of the insurance provider.
We would like to provide the following advice to consumers:
- Do not purchase any insurance product that you do not fully understand.
- You should consider whether you really need this insurance and also check who underwrites the product and administers its application.
- The person who sells you the insurance, or the company he or she represents, should be a licensed financial services provider.
- In terms of the Financial Advisory and Intermediary Services Act, the salesperson is obliged to tell you that you don’t have to take out credit life insurance if you already have sufficient insurance to cover the debt in the event of your death, disability or retrenchment.
- You could cede your existing life assurance policy to cover the debt – keep in mind that the onus is on you to check that the credit provider cancels the cession once you have repaid the debt.
- If you buy credit life insurance when you sign a hire purchase agreement, the salesperson must disclose all commissions and fees to you upfront.
- In addition, a copy of the policy document or schedule, which sets out the benefits offered, should be given to you. You can request a copy of the insurance schedule before you decide whether or not to take up the insurance offer.
- Always read the fine print of any loan agreement to determine whether credit life insurance is required.
It is best to consider all financial decisions with caution! Do not be rushed into signing any policy and only do so after you have completed a financial needs analysis and it is found that you do need additional life cover. When you do decide to purchase credit life insurance, do so through a registered and reputable insurer, having carefully studied the terms and conditions and keep all the policy documentation in a safe place!