Credit Life Insurance 101

Credit Life Insurance 101

Credit Life Insurance is poorly understood in South Africa. This is ironic, because it’s one of the best risk management tools available to the consumer - especially in challenging economic times.

From COVID-19 to junk status, few would argue that 2020 qualifies as challenging! So why don’t consumers know more about Credit Life Insurance and the protection it offers?

Here are some important facts about Credit Life Insurance:

Q: What is Credit Life Insurance?

A: Credit Life Insurance covers a borrowers’ debt typically in the case of retrenchment, disability or death.

This type of insurance is sometimes – but not always – legally required when you borrow money or use certain credit facilities.

Q: Why does it matter?

A: Most debt is structured around the consumer’s salary, which defines how much money they can afford to pay to service the debt every month. The big risk for the lender and the borrower is if something unforeseen happens that eliminates the borrower’s salary, and therefore their ability to pay back the loan.

If the unexpected happens, the borrower (or their family, in the case of death) can be forced to pay-off the outstanding amounts. But often, after a lot of effort, they just can’t manage it, and the credit provider that issued the loan never gets its money back.

Q: Why do so few consumers understand how it all works?

A: Credit Life Insurance is generally offered by the credit provider offering the loan. Typically, the product is bundled into the overall loan structure and consumers are unaware that they have cover. In August 2017 new regulations were released. These require credit providers who offer Credit Life Insurance to be explicit about the cover, what the benefits are and how much consumers will pay for it. Even so, when consumers are in the market for credit, they often overlook the addition of Credit Life Insurance because they are so keen to get approval for their requested loan. So, they don’t interrogate the benefits they have, nor do they consider shopping around for more affordable cover.

Q: Ok, my Credit Life Insurance eyes are officially open! But what should I do next?

A: Well, the first tip is, don’t do it alone! Credit Life Insurance impacts the whole family, so if you’re in a relationship, sit down with your partner (or anyone who plays an important role within the family) and write up a list of your different credit facilities. The list should cover house and car loans, student loans, personal loans, credit cards and store accounts.

Once you have a list, find the paperwork for each facility and establish if it has Credit Life Insurance attached (if you can’t find the paperwork, call the service centre). If the policy does have Credit Life Insurance, write down how much you are paying for that insurance every month.

Now you should have a clear idea of which loans might leave you or your family liable for the debt if the worst happens. It is a good idea to take out Credit Life Insurance policies for any large amounts that feel especially worrying to you.

You should now also be able to add up the different premium totals and establish how much you’re paying, in total, for all your Credit Life Insurance policies every month.

Q: Ok, that’s a lot of work, but I will get to it. What next?

A: Not a lot of people talk about this, but it’s your legal right to choose your own Credit Life Insurance provider. And of, course, different providers charge different premiums.

South Africa currently has a couple of standalone Credit Life Insurance providers who you can take up a separate policy with. Yalu - which is underwritten by Old Mutual Alternative Risk Transfer (OMART) - is one of the most visible in the market at the moment. So, consumers could save money every month by switching their credit life insurance policies and best yet, consolidate all the different credit life insurance policies attached to different debt into one policy, making it easier if they should ever need to claim.   

This ability to consolidate the policies into one policy could also have additional savings for the consumers.

Q: How much money are we talking about here?

A: Every person has a different situation, so it’s impossible to say. But for people with multiple loans across different providers, it can be significant.

Q: How do I find out how much I could be saving?

A: You can do the work yourself by phoning around to different providers and comparing costs. Of course, you need a lot of personal commitment to make this happen, which is why so few people do it.

Another option is to use the facilities offered by providers themselves. The Yalu website, for example has a 5-minute take-up process. The user enters a few personal details and the system shows them a list of their loans, tells them how much these loans are costing them and how much they could save by switching. It also has the capability to generate quotes in cases where a consumer is just looking to consider their options.  

Q: Great. It’s as simple as that?

A: Yup. The only challenge is that it can sometimes take longer than the 30 days that is often stipulated in the Terms and Conditions of different providers to cancel your existing Credit Life Insurance.

Q: That sounds like a pain. What do I do in this case?

A: First, understand that it’s your legal right to choose a provider yourself. Credit providers cannot stop you from doing this. If you feel they are, you can and should hold them to account.

Consumers should also be aware that they can be compensated for any lost savings that result when a provider delays a switching request, via the National Credit Regulator claims process.

Q: And finally, what do I do if the worst happens and I need to claim?

A: Contact your credit life insurance provider immediately. They will walk you through the claims process, and if all is in order, your debt will be paid or in some cases settled directly with the lender.

Issue date: April 2020