Insurance shouldn’t ruin your life

2011-09-17 14:31

Credit life insurance can be useful as it settles your loan if something happens to you.

Unfortunately, however, unscrupulous lenders are using it to circumvent the limit on fees and interest placed on them by the National Credit Act.

Ian Wason, chief executive of debt counselling company DebtBusters says he comes across many cases where micro-lenders are charging exorbitant premiums for the insurance.

In some cases credit providers are committing fraud by selling fake policies.

The problem is that the credit providers often prey on people who are already in financial difficulty and may not qualify for loans from better known institutions, and these credit providers may threaten not to provide the loan if you do not take out the insurance.

Wason says often people do not realise that they can claim against their insurance policy if they are retrenched. They renege on their debt repayments or tap into savings to pay the debts.

Before signing up for an insurance policy, do your homework first. Credit life through the banks or larger insurers can be cheaper than taking out individual insurance if you have a health risk or you are more than 40 years old as it does not require underwriting.

But it can be more expensive if you are younger and healthy. In this case you may be better off taking out an individual policy which rewards you for being a lower risk client.

Know your rights
It is important to know that according to the National Credit Act you are not required to take out credit life through the credit provider and you are entitled to shop around for a better rate.

You are also entitled to use existing life cover you already have to meet your credit provider’s requirement.

In some cases micro-lenders sell funeral cover as a form of credit life, however this will not protect you if you are retrenched or become disabled or ill. It is important to find out exactly what cover you have.

There have been reports of unscrupulous car dealerships stating that your loan will not be approved without credit life; however this is not the case.

WesBank, the vehicle financing arm of FNB, says that “while we afford consumers the opportunity to include this policy on their vehicle finance agreements, in no way does this form part of our criteria for the approval of vehicle finance, as this is not mandatory”.

If you challenge your credit provider and state that you will shop around for insurance and they will not approve the loan on that basis, then report them to the National Credit Regulator.

Know the rates
For personal loans, credit life premiums should not exceed R4 per R1 000 of cover.

The rate can vary depending on the size of the loan from R2 to R4 per R1 000, however if you receive a quote of R4 per R1 000 or more, then you should shop around.

You can calculate the rate you are being charged by dividing the loan amount by 1 000 and then dividing the premium by this amount.

For example if the loan is R10 000 and the premium is R30, divide R10 000/1 000 = 10 then divide the premium R30/10 = R3 per R1 000 of cover.

Larger loans like car finance tend to have much lower rates.

According to MiWay insurance, for credit life on a car loan, they would charge between R100 to R150 per month for R150 000 worth of cover, which works out at R1 – R1.50 per R1 000. 

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