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Beware the add-ons if you take out an unsecured short-term personal loan from a bank: exorbitant interest rates – in the region of 30 percent – administration charges and life assurance premiums could see your paying back an additional 60 percent-plus on the loan.
The life assurance – which covers the loan in the event of death, disability or retrenchment – into which the banks will steer you is about the most expensive on offer.
The premium on the life assurance may also be added to your loan amount, with the result that you will be charged further interest.
Ordinary life assurance, on average, costs less than a quarter of the life assurance sold by the banks to cover unsecured personal loans.
The life assurance sold by the banks to cover unsecured personal loans is provided by life companies that are owned either by the banks or by companies associated with the banks.
The Financial Services Board (FSB), the National Treasury and the National Credit Regulator are about to launch an investigation into credit life assurance in general, and the investigation will include the banks’ assurance products.
Jonathan Dixon, the FSB’s deputy executive in charge of insurance, says the FSB is concerned about the terms and conditions under which the banks force borrowers to take out high-cost short-term insurance.
The banks use tactics such as insisting that the life assurance includes the payment of a benefit to cover the repayments in case of retrenchment, Dixon says.
Nedbank, for example, argues that almost half the benefits in value paid on the credit life assurance is for retrenchment and that such cover is therefore essential.
However, the chances of claiming for life and disability are far lower for credit life assurance, because most borrowers are younger and not in the high death claim bracket, and this increases the potential profits for banks or associated companies.
The FSB’s investigation into the credit life assurance industry will include a survey that raises questions about assurance products linked to bank products, Dixon says.
The banks appear to be doing everything possible to prevent borrowers from taking out cheaper life assurance options – for example:
* Nedbank financial advisers have told Personal Finance that they have been threatened with disciplinary action if they try to sell more affordable life assurance to people who take out a personal loan.
In response, Nedbank says its financial advisers are not involved in the personal loan arena and claims it “would not threaten disciplinary action to a financial planner (adviser) who gives appropriate financial advice”.
* First National Bank (FNB) recently launched a life assurance product that, it claims, is cheaper than any other similar product (see “FNB product can cut premiums by up to 50 percent”, below).
But the FNB product comes with two conditions:
1. It is available only to select FNB clients; and
2. It is not automatically available to FNB clients who have unsecured short-term personal loans.
* Banks are making it difficult for borrowers to cede existing life assurance policies or new policies by insisting that the policies have a a retrenchment benefit. Very few individually underwritten policies have retrenchment benefits.
The banks have added to the difficulty by not selling stand-alone retrenchment assurance.
The nominal premiums on the policies sold in tandem with personal loans exceed 10 percent of the loan amount, and the premiums are considerably higher than those on normal underwritten life assurance.
Banks, in their documentation, inform clients that they can obtain life assurance elsewhere, but, on the basis of complaints received by Personal Finance, this is often not pointed out verbally. The insinuation often is that in order to qualify for the loan, clients have to buy the “bank’s” credit life assurance.
Staff who issue policies should register under FAIS
Banks may be contravening the Financial Advisory and Intermediary Services (FAIS) Act by not ensuring that employees who issue personal loans and sell life assurance to cover debt are registered as representatives of financial services providers (FSPs).
Nedbank, which is registered with the Financial Services Board (FSB) as an FSP, has told Personal Finance that personal loans “are granted by bankers or personal loan agents, who are not registered under (a) FAIS licence to advise on life assurance. Nedbank financial planners (advisers) are not involved in the granting of personal loans in the unsecured environment.”
Asked whether Nedbank was contravening the FAIS Act, the bank replied that the Act was “not applicable, as bankers and personal loan agents, who grant personal loans, are not registered under FAIS to provide advice”.
In response to Nedbank’s claims, Gerry Anderson, the FSB’s deputy executive in charge of market conduct says: “I have perused the response received by you from Nedbank. It is incorrect to state that an individual who is involved in the sale of an insurance product of any nature (including a bank employee) is not required to be FAIS-registered. The provision or not of advice in such cases is not the determining factor, as intermediary services (the other leg of FAIS) may be involved.”
In a follow-up response, Nedbank says that “due to the fact that personal loan consultants do not provide advice, and perform clerical and administrative services in a subordinate capacity which does not require judgment on the part of consultants, the consultants are not considered to be representatives in terms of FAIS, and accordingly are not required to be registered.
“We are compliant with the requirements of FAIS and are in line with the unsecured lending industry and our competitors.”
What you should know when you buy a bank’s policy
* No bank is entitled in any way to force you into an expensive credit life assurance product, even by inferring that the loan will not be available if you do not buy its product.
Banks are allowed to make life assurance a condition of granting a loan, but they may not prescribe which life assurance you may use.
However, the banks may dictate the type of policy that may be ceded. For example, the banks may, and mostly do, insist that your policy contains cover in case you are retrenched.
You are entitled to, and should shop around for, the cheapest option. Individually risk-rated life assurance may be cheaper, even if you suffer from health problems or are elderly, because the premiums for bank-sold life assurance linked to unsecured short-term personal loans are excessively expensive.
* You may cede an existing life assurance policy to cover the loan should you die or become disabled and are unable to work before the loan is repaid, but there will probably also be a requirement that it has a retrenchment benefit.
* If you use bank-provided life assurance linked to an unsecured short-term loan, always pay the premium separately. Do not allow or accept an option where the premium is added to the loan amount, because, if you do, you will pay interest on the premium.
This is what it can cost you
The total nominal premium for life assurance from Nedbank to cover a loan of R100 000 over two years is R10 558 (R439.95 a month), which equates to 10.6 percent of the value of the loan.
The premium for the individually risk-rated life assurance product from First National Bank (FNB) for a man aged 40 for cover of R1 million is R193 a month, with the premium guaranteed for five years.
So the FNB individual life policy costs you R1 a month for every R5 181 of cover, whereas the Nedbank credit life assurance attached to its personal loans costs R1 a month for every R24of cover.
In other words, 10 times the amount of cover on the FNB policy costs a fraction of the Nedbank credit life cover for R100 000. But roughly the same comparison can be made with the credit life assurance sold by FNB to borrowers with unsecuredpersonal loans.
The situation is worsened by the fact that credit life assurance sold by the banks pays out benefits equal to the reducing outstanding loan amount. This pushes the difference between the cost of the premiums on an individual policy and those on the credit life polices to excessive levels.
The benefits of the FNB product are level for the full period of the assurance, so if you die 18 months into the 24-month loan, your beneficiaries will still receive the full R1 million.
You can buy two types of cover linked to a loan
Life assurance linked to an unsecured loan sold by a bank may or may not be cheaper than a policy you can buy elsewhere.
It depends on whether the policy is sold on what is loosely called a group scheme basis, where everyone is assumed to be more or less equal and pays the same premium, or on an individually risk-rated (or underwritten) basis, where the premiums are adjusted according to your personal circumstances.
If you are individually risk-rated, factors such as your age, gender, health, education, job, hobbies and whether or not you smoke are taken into account.
For example, you will pay a very low premium for an individually risk-rated policy if you are a 25-year-old healthy, non-smoking woman who works as a chartered accountant, but if you are a 60-year-old man who smokes and who works as a semi-skilled labourer in a mine, you may find that a group scheme policy will be cheaper.
In other words, the more likely it is that you will meet an early demise, or suffer from a disease or have an accident that could undermine your ability to earn a living, the more you, as an individual, will pay for life cover.
There is very little cross-subsidisation between high-risk and low-risk individuals with an individually risk-rated policy. But with a group scheme policy, such as a credit life assurance product, there is extensive cross-subsidisation, because it is virtually assumed that everyone is at the same level of risk. The effect is that the young, educated and healthy subsidise the old, less educated and unhealthy.
In most cases, you will be required to undergo a thorough medical check-up before you will be issued with an individually risk-rated policy. Your premium, and even whether or not you will be granted life assurance, will depend on the results of the check-up.
It is likely that you will be asked some questions about your health when you apply for group cover. For example, you may be asked if you currently suffer or have recently suffered from a severe disease. If you do or you did, you may be denied life assurance.
You may also be required to undergo an HIV test, which will determine whether or not you qualify for a policy.
FNB product can cut premiums ‘by up to 50 percent’
First National Bank (FNB) has launched a life assurance product, restricted to its account-holders, that, FNB claims, can cut your premiums by up to 50 percent.
The policy, which is underwritten by FNB’s associated company, RMB Structured Life Limited, provides cover in the event of premature death, as well as optional cover for incapacity (you cannot perform various daily activities) and retrenchment (a lump sum equal to five percent of the life cover up to R100 000, and the premiums are paid for six months).
The death cover is for life, but the incapacity and retrenchment cover is limited to age 60.
There are two premium options:
* A guaranteed premium for the first five years, which may then be increased, depending on your claims history. However, FNB says the pricing has been done as if for life, so it does not expect any significant premium increases over the assured period.
* A premium that escalates at five percent a year. This option allows for a lower initial premium.
The amount of your monthly premium will depend on the additional benefits you choose, your age, gender, income, education, smoker status and general state of health.
Although this is a direct-sell product, it is not a “group” product where the low-risk policyholders cross-subsidise the high-risk policyholders.
Prospective policyholders have to answer questions about their health – the answers to which will affect their premiums – and undergo an HIV test.
The incapacity benefit pays out only once and will reduce the life cover by the amount of the benefit paid. If the incapacity benefit equals the life cover, the entire policy ceases.
The incapacity assurance is not disability assurance but is based on things such as whether you can no longer do your job. It pays out if you are totally and continually unable to wash, dress or feed yourself, or perform physical activity. It also pays out if you suffer from any of 20 serious conditions, ranging from a stroke, a heart attack and cancer to loss of hearing, sight or speech.
There are a number of exemptions and qualifications for the payment of the incapacity benefit, which is based on a points-scoring system according to your inability to perform daily activities. You need a minimum of six points to qualify for a benefit.
Unsecured lending up
The National Credit Regulator (NCR) announced this week that there has been a “continued increase” in unsecured lending over the past quarter.
According to a report by the NCR, unsecured credit increased from R18.95 billion for June 2011 to R21.21 billion for September 2011 – a quarter-on-quarter increase of 11.92 percent.
Rajeen Devpruth, the manager of research and statistics at the NCR, says the increase in unsecured lending may in part be attributed to the 11 additional credit providers that were previously not reported on.
The NCR has cleaned up its database, which now has 4 500 credit providers, Devpruth says.
There is “massive” competition in the market, especially in the area of unsecured loans, among the banks, he says.
The banks continued to dominate the consumer credit market at September 30, with a market share of R1.12 trillion (88.37 percent). Retailers’ share was R38.97 billion (3.08 percent), non-bank vehicle financiers had R41.87 billion (3.31 percent) and “other credit providers” had R66.41 billion (5.24 percent).