Battling to make ends meet? Claim from credit life insurance
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During last week’s enthusiasm about payment holidays and what banks were doing to help, only two financial services providers - African Bank and First National Bank (FNB) - alerted customers to the option of credit life insurance.
Payment holidays and other temporary relief measures have always been available to banking clients, but interest and fees continue to mount. Credit life insurance, on the other hand, is a facility many consumers might be unaware of, even though it is a condition of most credit extensions. At a time when people are faced with short time, or retrenchment due to Covid-19, it’s a particularly welcome instrument.
Credit life is an insurance product designed to cover your debt if you become disabled, unemployed, severely ill or die. If you’re a pensioner, or self-employed, you don’t qualify for the insurance.
Credit providers can make credit life insurance mandatory when extending credit. Lee Naik, the chief executive of TransUnion, says in terms of section 106 of the National Credit Act (NCA), a credit provider may require a customer to take out credit life insurance, but consumers do not have to take up the credit provider’s policy: they can cede an existing policy, provided it has adequate cover.
“A credit provider can also offer a customer additional insurance, provided the customer is properly informed of their right to waive and such insurance is not unreasonable,” Naik says.
In 2017, new regulations were introduced around credit life insurance, in terms of the NCA. The regulations, governing all new products sold after the effective date, August 9, 2017, placed limits on the cost of credit life insurance so consumers can be charged a maximum of R4.50 per R1000 on unsecured loans, developmental credit agreements (for example, student loans) and other types of credit agreements. Home loan credit insurance cannot exceed R2 per R1000. When a client becomes permanently disabled or dies, all outstanding debt for the products covered by credit life insurance is settled. If they lose their job, the cover pays their instalments for up to a year, or until they find employment.
Naik says consumers should not assume their payment arrangements are automatically adjusted - they should speak to their bank to understand what cover they may have under credit life insurance, or what a payment holiday could mean.
“From a credit bureau perspective, banks will continue to submit data to the bureau industry during the payment holiday period. Banks and lenders are able to indicate in their data submission whether a transaction is for a deferred payment or for an extended loan term. Credit bureaus are able to process the consumer data and this will prevent a default on the consumer’s credit report.”
Nkazi Sokhulu, co-founder and chief executive of credit life insurer Yalu, believes credit life insurance is a vital risk management tool for consumers, but says it’s one of the least understood product lines - with one of the lowest claims rates.
“A lot of South African families spend years paying off debt (unnecessarily), unaware that they have insurance in place to cover what they’ve borrowed. It’s crucial as our economy contracts and Covid-19 spreads that we change this.”
He says two of the most important impacts of Covid-19 are death and retrenchment, which credit life insurance offers vital protection from.
“Every family should be aware what policies they have in place. You can’t claim if you don’t understand what policies you have.”
African Bank’s chief executive, Basani Maluleke, says they do not believe short-term stopgaps such as payment holidays are the only answer. “We have identified customers who may qualify for a payment break and we are getting in touch with them directly,” Maluleke says. “However, we encourage all customers who are experiencing financial strain during this period, to contact us to discuss payment arrangements that meet their needs. Changes to payment arrangements are considered on a case-by-case basis.”
However, she says that if loan customers are retrenched, receive short time (that is, lose 20% or more of their income) or are placed on compulsory unpaid leave, the bank can cover their monthly payments for up to 12 months through their credit life insurance policies.
FNB chief executive Jacques Celliers says the bank’s internal life insurance business has been a “big lever to pull” as part of its credit relief for customers, and FNB will assist customers to submit credit life insurance claims.
Absa, on the other hand, has reviewed its credit life products’ retrenchment benefits to provide more comprehensive cover. Dushen Naidoo, the managing executive: insurance at Absa Retail and Business Bank, says: “Retrenchment benefits under credit life policies will pay the minimum instalment on customers’ credit agreements for three months if they are unable to earn an income. This is applicable to all credit life claims that occur between April 1, 2020 and June 30, 2020.”
Even if you’re not thinking about claiming yet, Sokhulu advises customers to investigate what they are covered for and that they shop around, because it can result in significant savings on large loans, such as mortgages.