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Credit life insurance in South Africa

Do you know how credit life insurance in South Africa works? Credit life insurance provides cover in the event of you having outstanding debt when you pass on. It usually also pays out if you are disabled or retrenched.

It is by far the most common form of long-term insurance by number of policies sold, although it can be a short-term insurance product, too, and although the premiums are usually low, profit margins are extremely high.

In South Africa, the question if consumers are getting a fair deal and one that adds value when purchasing credit life insurance is by no means an open and shut case and it remains the topic of ongoing debate.

There has been a widespread abuse of consumers who have this cover from mis-selling to gross over-charging. Consumers must beware, since the publication of the regulation is imminent.

A credit provider can insist you have it: In terms of the National Credit Act (NCA), credit life is mandatory, and therefore a credit provider can insist that you have a credit life insurance policy for the duration of a credit agreement. Even the credit provider can offer you these services, you have the right to obtain cover elsewhere or use an existing policy.

If you have to take out a credit life policy, you cannot be made to buy it from a particular insurer, and the credit provider must make you aware of your right to choose your insurer. It should also be disclosed to you if the credit provider receives any benefit, such as commission, for selling you insurance, or arranging cover on your behalf.

The policy must cover your entire debt: The NCA states that a credit life policy must cover the consumer’s “total liability in terms of the credit agreement”, and you cannot be required to maintain a policy in excess of your liability at any time.

Your premium won’t necessarily decrease as your debt does: Given that you can’t be required to maintain a policy in excess of your liability, you would expect your premium to reduce in line with your debt. But not all credit life policies work this way, and it is legal for an insurer to charge you a “level premium.”

You cannot be charged interest on your premium: The NCA does not allow the insurance premiums to be added to your debt and interest to be calculated on the total. This applies to credit shortfall insurance, also known as top-up cover, which is sold with vehicle finance, and homeowners insurance, which covers the structure of your home and is sold when you take out a home loan, as well as personal loans and credit agreements that cover retail goods.