Do you have Credit Life insurance?
Correspondent | Friday May 31, 2019 20:59
In a nutshell, Credit Life is a form of insurance that pays off the outstanding loan balance in the event of death, disability or other insurance risks that impair the creditor’s ability to earn an income or meet their debt obligations.
Credit Life is often poorly understood with little knowledge of how it works or what the rights of the policyholder are. Traditionally, the most common way of acquiring a loan is through a bank or micro lender.
Most Financial Providers, if not all, will expect you to take out Credit Life Insurance to protect your life for the period of the loan. For example, the period for vehicle loans and personal loans are typically between 12 and 60 months, while a mortgage loan, ranges from 10 to 25 years.
Financial Institutions have a legal right to request this type of insurance as it helps to minimise risk. But what are your rights as a consumer when taking Credit Life Insurance? While premiums are often added to the loan amount, it is actually the consumer’s prerogative to choose their own Credit Life Insurance. Once the Financial Provider has approved your loan, you should be informed of the loan amount, the interest payable on the loan, the Financial Provider’s administration cost and finally the Credit Life Insurance premium.
With this information of the premium and what is covered, consumers can compare life insurance offerings, costs, and commission. However, these quotations are often very difficult to decipher, therefore seeking help from an alternative underwriter or broker is imperative.
This is where things become a little confusing, as most Financial Providers have an agreement in place with a specific Life Insurer.
This agreement can be with an independent Insurer who is not part of the same group as the Financial Provider, or, as with many of the banks, the insurer and the bank belong to the same “stable”-this is often referred to as an in-house insurer. In other words, all the Financial Provider’s credit life business is underwritten by the same Life Company group.
Most clients who borrow money, are often too grateful for the loan approval and accept the insurance offered to them by the Financial Provider when in fact they have the right to choose an insurer. Financial Providers are aware of this and should agree to accommodate your policy as long as it provides the cover/benefits which meet their criteria. They can insist on Credit Life Insurance but they cannot insist that you take up their insurance offering.
It is therefore important to do your homework and compare premiums and coverage. Outside of a mortgage, it is advisable to consider a premium payment. A single premium has the advantage of an unchanged rate.
Through this option, you will pay the total premium at the commencement of the loan. This often forms part of the loan, or in the case of a personal loan, you can deduct it from the loan amount you receive and pay over the premium to the insurer. It is important to discuss with your Insurance Provider the payment frequency that suits you best.
A credit life policy is always a TERM policy, lasting as long as the term of the loan. A Pure Life policy, on the other hand, is often a policy for your entire life.
Pure Life policies have a level value; the value remains the same (except if it has an inflation component or you decided to increase the value of the policy). A credit life policy has a decreasing term - the original term of the policy decreases with the loan each month and it will become zero by the time you have fully paid back your loan.
Whole of Life policies (Pure Life) are often more expensive than Credit Life or term policies and are an expensive way to insure your credit life risk.
Should you use your Pure Life Policy, which is meant to finance your family if something unfortunate happens to you, you stand the risk of not having sufficient funds left in such a policy.
Borrowing money is expensive, and having to insure it makes it more expensive. Why pay more for less, when you can pay less for more? Seek advice and explore your options before taking up a policy.
MARINDA BOTES*
*Marinda Botes - CEO of Western Life Insurance Botswana.