Guide to credit life insurance

Credit life insurance (CLI) is an insurance policy that is designed to pay off your debt if you pass away, become disabled or lose your job. That way, you or your estate will not have to deal with paying the debt off, on top of losing a loved one. 

“Typically, CLI covers consumers in the event of death, disability, or loss of income due to injury, illness or involuntary unemployment (which is credit life insurance) or theft, destruction or damage of the asset in respect of which the debt is incurred (which is known as credit asset insurance),” explained National Treasury.

Werner Alberts, the CEO of Old Mutual Finance explains: “Credit life policies can be taken out either as a stand-alone policy to cover many different loans with different credit providers or as separate policies, each covering a specific loan.” 

Introduction to CLI 

“Credit life insurance may be the first type of insurance that many low-income consumers encounter,” said Treasury.

Treasury also said that CLI is not normally sought out by many consumers, but some credit providers will need you to sign up for CLI before they give you a loan.

“SA law allows credit providers to insist on CLI cover as a condition of granting credit. Though consumers must by law be allowed to choose a preferred insurance provider, evidence as outlined below suggests that this choice cannot easily be exercised in practice,” said Treasury.

Any criteria to meet when applying for CLI? 

“Generally there are very few specific requirements except that some risks may be covered only under certain conditions.  For example, you cannot buy a credit life policy to cover retrenchment risk if you are not employed full time,” said Alberts.

Also, if you have a pre-existing health condition you might be excluded from some policies.

“To apply for a credit life policy, you need to have a valid ID, proof of address and a bank account,” said Alberts.

Disabilities and accidents 

“If you become disabled, your credit life insurance will generally pay the loan instalments for a period of up to 24 months,” said Alberts.

However, if you become permanently disabled, the full outstanding balance of the loans will be covered, explained Alberts.

There are some policies which provide accident cover. These will generally cover up to three months of loan instalments.

“Some policies also provide cover in the event of hospitalisation (not related to an accident). If the policy provides retrenchment cover, the insurer will pay your loan instalments for a period of 6 – 12 months (depending on the specific policy). In some cases, the full outstanding balance will be paid if you are still unemployed after 12 months,” said Alberts.  

How Does It Work?

InsuranceOnline has outlined how a credit life policy works:

• When you die, the policy will immediately pay out the outstanding money due on your debt. This can be long, or short form debt.
• A credit life loan is valid for the whole period of the contract, even if you took the loan out after you incurred debt.
• “The pay-out amount decreases in correlation to the repayment you make on your loan, which makes it a decreasing sum assured product,” said InsuranceOnline. Therefore, the more the debt you pay off, the less you have to pay into the insurance policy.
• If you happen to lose your job due to retrenchment, then the policy will pay you out for up to six months, to help you with your loan repayments. However, each policy is different in the amount it will pay out, and you should check with your provider.
• A credit life insurance policy is not only for if you pass away, but it also includes the perks of dread disease cover and occupation-based disablement cover.

Problems with CLI

However, CLI is not as great as it might sound. Industry experts have said that CLI serves the purpose of the creditor, rather than protecting the consumer.

“The panel report, found that while consumer credit insurance (CCI) [also known as CLI] fulfilled a definite insurance need, it is in the first instance designed to serve the interests of the credit provider and that there were deficiencies in the system that could be exploited by unscrupulous providers,” highlighted Nina Shand with Janice Angove in a document for FinMark Trust.

This lack of trust of CCI is not only felt in South Africa, explained Shand, but internationally as well.

This can be seen in an article written by Forbes, saying that “Credit life insurance isn’t even a benefit for the consumer, it’s a benefit for the lender.”

Tips for consumers 

Alberts shares the following tips on getting the right credit life insurance cover:

• Make sure you know what you are buying, especially when premiums are cheap – generally you get what you pay for.
• Also, make sure you ask about future price increases. Some policies start at a low price and then increase annually by more than inflation. 
• Make sure that the insurer that you choose has a good reputation for providing excellent customer service and paying claims.
• If you are unsure, please talk to a qualified financial adviser.
• Finally, make sure that you have a copy of your credit life insurance policy and that your spouse and/or trusted relatives know where to find it. Too often a loan is covered by credit life insurance but the customer or their family relatives are not aware of it.

 
As with buying any financial product, make sure that you read over the policy, know how much you are going to pay for it, and what it pays out to you. Shop around for the best deal, and one that suites your life the best.

“Customers must spend time to fully understand thelist of exclusions of each policy and must also provide honest replies to questions on pre-existing conditions. It is better to know upfront if a policy will not cover a pre-existing condition than find out later that you are not covered,” concluded Alberts.