Credit life insurance on loans: what it is and what to ask before you agree

What is credit life insurance on a loan?

Credit life insurance is insurance that a credit provider can require or offer when you take out a loan. The National Credit Regulator (NCR) describes it as cover that pays the debt due to the credit provider in certain cases, such as the death of the consumer.

It is different from the life policy you may have for your family. Credit life exists to deal with the loan. If the policy pays out, the money goes towards the debt, and it does not become a cash benefit to your estate or family.

In the case of a short-term loan the premium may be small in absolute terms because the loan is small and brief, but it still counts as part of what you pay.

Why do lenders offer or require it?

A lender wants to be repaid even when something serious changes your circumstances. Credit life gives it protection against that, and it can also protect your family from being left with the debt.

The National Credit Act allows a lender to require you to maintain credit life insurance, but it limits the requirement. The cover may not exceed the total of what you still owe the lender at any time during the agreement, and it must reduce as the balance reduces.

The Act also says a credit provider must not offer or demand insurance that is unreasonable or at an unreasonable cost to the consumer, having regard to the actual risk and liabilities in the agreement. If a policy looks out of proportion to your loan, ask the lender to justify it.

What does credit life insurance usually cover?

The Credit Life Insurance Regulations of 2017 set the minimum benefits that a policy must offer and the limits and exclusions that may apply. According to the NCR's announcement of the final regulations, a consumer who dies or becomes permanently disabled will have the outstanding debt under the credit agreement settled by the policy.

If the consumer loses their job, the policy will pay the instalments due under the credit agreement for up to 12 months. The NCR also states that consumers who are not employed cannot be sold retrenchment cover, since it would not apply to them.

These are general descriptions. The exact events, waiting periods and exclusions in your policy are in the policy terms, so read them. Our guide to short-term loan costs shows how the premium fits among the other charges.

How much can credit life insurance cost?

The regulations limit the cost. When the final regulations were published in February 2017, the NCR announced a limit of R4,50 per R1,000 of the deferred amount for credit facilities, unsecured loans and developmental credit agreements, and a lower limit for mortgage agreements. Limits can be updated, so check the current figure with the National Credit Regulator before relying on it.

The NCR has since invited comment on a review of the regulations, so the limits may change. Check the current figures with the NCR instead of relying on a number printed in an article.

Whatever the limit, the premium is a rand amount that you pay, so it belongs in your comparison. The NCR notes that credit insurance should be shown in the total cost of credit, and the pre-agreement statement and quotation must show it if it applies.

Can you use your own policy instead of the lender's?

Yes, in many cases. Section 106 of the National Credit Act says that when a credit provider proposes a particular policy, the consumer must be given, and be informed of, the right to waive that proposed policy and substitute a policy of their own choice.

The NCR's guideline on the application of the credit life regulations adds detail. If the lender required cover as a condition of the agreement and you exercise this right, the lender must accept your substitute policy if it complies with regulations 3 and 4 of the Credit Life Insurance Regulations. It must also tell you in writing about the provisions of regulations 3(3), 3(4) and 3(5).

You can also switch later. The guideline says that if you substitute a policy at any time after the agreement is entered into, the lender must accept it, provided that the new policy gives at least the minimum benefits in regulation 3.

In practice, ask your insurer whether an existing life or credit policy qualifies, and show the lender the policy terms. A policy that does not meet the regulations will not be accepted.

Where do you see credit life insurance in the quotation?

The NCR's consumer leaflet says the pre-agreement statement and quotation must disclose, among other items, the amount borrowed, the number of instalments, the interest payable, any additional charges, credit life insurance, and the dates of the first and last instalment.

Look for a line in rands that is clearly labelled as insurance or credit life, and check whether it is included in the total repayable. If it is missing but you were told about insurance, ask the lender where it is. If the line is bundled into a vague label such as 'admin' or 'other charges', ask what it is.

Check also whether the cover is optional or a condition of the loan. The answer determines whether you can decline it or replace it.

What questions should you ask before you agree?

A few direct questions will tell you most of what you need. Ask them in writing if you can, and keep the answers with your agreement.

If the answers are vague, or the lender cannot explain the premium or the cover, pause. A lender that cannot explain what you are paying for is not ready for your signature.

• Is credit life insurance required for this loan, or is it optional?
• What is the premium in rands, and is it included in the total repayable?
• Which events does it cover, and what are the exclusions and waiting periods?
• Who is the insurer, and how do I claim?
• May I use my own policy instead? What does the policy have to meet?
• What happens to the cover if I settle the loan early?

What should you keep in mind about the limits of the cover?

Credit life is a safety net for specific events, and it does not remove your duty to repay in ordinary circumstances. It will not help if your income is simply lower than your repayments or if an event falls outside the policy terms.

That is why the starting point is always affordability. Work out your budget first, borrow only what you can repay and use insurance as a back-up and not as a reason to borrow more. Our guide on how much you can afford to borrow shows a simple way to test the figures.