This article was first published in the 1st quarter 2018 edition of Personal Finance magazine.

Credit life insurance is among the most widely available insurance products to consumers globally, but research shows that many South Africans have limited knowledge about the product and the benefits it offers them.

The insurance, which you are obliged to take out when you buy something on credit or take out a loan, covers your debt in the case of death, disability, terminal illness or unemployment.

Legally, a credit provider can demand that you maintain the cover throughout the period of your loan or credit agreement. As the debt declines, the payout decreases, and so should your premiums. In technical terms, this type of insurance is known as a decreasing sum assured product.

Sasha Knott, the chief executive of credit life insurance company Switch2, says research conducted by the FinMark Trust, an independent trust empowering the poor financially, showed that most credit life insurance products offer questionable value for money. In addition, consumers are often unable to choose their product provider and there is insufficient disclosure of the costs involved.

Credit life insurance in South Africa: the consumer’s perspective, a 2013 report by Nina Shand and Janice Angove, concludes that credit life insurance is more expensive than life policies available on the open market. With low claims ratios and high expense ratios, they offer poor value to consumers and primarily serve the interests of the credit provider.

The research showed that consumers benefit from seeking out the cheapest credit option, including the credit life component, as prices differ between suppliers. However, few people investigate alternative options and instead use the “default” product offered by the credit provider. But there are also barriers to shopping around for policies – quotes are difficult to obtain.

Knott says having an easily readable, simple quotation is the first step in exercising your right to freedom of choice. Without that information, you cannot shop around and compare products and costs.

Also, sales staff are typically trained merely to provide the facts about the insurance and not offer financial advice.

Research undertaken by Switch2 showed that most consumers do not know what credit life insurance is nor what it entails. Only about one-third of consumers questioned knew what credit life insurance was, and, of those, 74% thought the insurance they took out with their purchases was free. Overall, only 4% could easily obtain and provide a copy of their insurance policy documents, which went some way to explaining the low claims ratios on this type of insurance.

Knott says consumers are unaware that they are not compelled to use the product offered by the credit provider and have the right to seek out their own insurance at a more competitive price.

She says typically credit life insurance policies pay out a lump sum equal to the value of the outstanding debt if the insured person dies or is permanently disabled. They also offer a benefit covering either a percentage of the outstanding debt or of the monthly instalment for a certain timeframe if the insured person is temporarily disabled, retrenched, placed on short-time leading to a reduction in their income, or forced to take compulsory unpaid leave.