Who benefits from credit life cover?

2014-07-21 08:00

It is supposed to cover any money you owe if you die before a debt is paid off. But, as Neesa Moodley-Isaacs finds, you could be charged more than normal life cover

When you borrow money to buy an item such as furniture, a car or even a home, you will most likely be offered credit life cover.

The intention behind credit life cover is ostensibly to make sure your debts are paid off if you die or if you are experiencing financial cash-flow problems due to retrenchment, a critical illness or a disability.

Unfortunately credit life is often not delivering on its promises and a recent report released by National Treasury has raised a number of concerns about industry practices that are skewed towards providers and not you, the consumer.

Concerns raised include:

»?A lack of transparency about the total cost of credit, which should include the cost of the credit life cover.

»?Higher premiums than you would pay for the same amount of noncredit life cover. In other words, it is often cheaper to take out normal life insurance to cover your debts than to take out credit life insurance.

»?Policy benefits that are not practical and are unlikely to be claimed against.

»?Despite credit providers complying with the National Credit Act, requirements such as full disclosure of commissions are not being carried out by staff in stores. For example, when asked if they had received a copy of the insurance policy document, only seven out of 35 micro-finance consumers said they had.

»?A lack of sufficient competition in the industry.

»?A low claims ratio. The average claims ratio is only 20% compared with the 61% average claim ratio for credit life cover on property.

Consumer complaints

Exclusions: The deputy ombudsman at the life assurance ombudsman’s office, Jennifer Preiss, says her office worked closely with the Treasury and the National Credit Regulator to help identify problems in the credit life cover industry.

“One of the main problems we have seen is insurers relying on clauses that exclude pre-existing conditions – for example, if the consumer has high blood pressure and then dies from a stroke.

Often consumers are unaware of these pre-existing condition exclusion clauses,” she says. But Preiss says the industry has moved to address this and the Association for Savings and Investment SA now requires insurers to impose limits on pre-existing exclusion clauses. For example, your pre-existing condition such as high blood pressure and all related health problems may only be excluded for an initial period of two years.

High costs: Credit life cover, which is taken out to cover specific debts, is usually more costly than usual life cover. However, if you are older and not in the best of health, credit life cover might work out cheaper.

Instead of rushing to sign on the dotted line when a sales assistant urges you to, take the time to compare your life cover options and select the option that makes the best financial sense for your pocket.

What you should be told

»?You have the option to source your own credit life cover or you can cede an existing life policy.

»?If you choose to cede an existing life policy to cover a debt, make sure you cancel the cession once the debt has been paid off. The cession is usually cancelled automatically but it never hurts to double-check.

»?Ensure there is a clause in the cession agreement stating that if there is any value left over in your policy after the debt has been paid, that money must be paid to your beneficiaries.

For example, if you have a life policy worth R500?000 and the debt you want to cover is R100?000, the remaining R400?000 must be paid to your beneficiaries.

»?Any commissions that are payable to the sales assistant or store.

»?Any penalties or charges that you have to pay if you decide to settle your debt and therefore cancel the credit life cover before the contract period expires.

»?The full details of the insurer underwriting the policy and the requirements for any claims you might make under the policy.

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