When a person dies, their debts don’t just go away - they still need to be paid. The same applies when a person is retrenched or not earning for any reason - debts must be paid. Life cover and credit life cover are two insurance products that can ensure your debts are paid in these circumstances. We look at the difference between them and find out how credit life cover policies work.
Do you need credit life cover in addition to life cover?
It depends on your individual circumstances. Could you continue to meet your debt repayments if you lost your income? If not, you probably need credit life cover in addition to any life cover you have. Read on for more on the difference between the two, and why you might need them.
Life cover and credit life cover explained
Most of us use debt to buy big purchases like homes and cars, and to purchase other essential items. These debts need to be paid. When you have a regular income, you can use the money you earn to pay your debts every month. But what happens if you don’t have an income, or if you aren’t around to earn one?
The pay-out from a life insurance policy can be used to pay your debts if you pass away.
A credit life policy will pay some or all of your debts if you lose your income, for example you lose your job, are retrenched, become disabled or have a serious illness such as cancer, or if you cannot work or earn an income in the COVID-19 lockdown. Credit life cover also covers your debts if you die, which means the pay-out from a life policy can be used for other expenses such as education for your children.
Where can you buy credit life cover?
There are many companies in South Africa who offer credit life cover. Some companies, such as Yalu, specialise in credit life cover. Insurance companies and most banks also offer credit life cover. You can take out credit life cover for a debt with any financial services company, it doesn’t have to be the same company that is giving you finance or a loan. You can also take out one credit life cover policy for each debt, or one policy for many debts, which may result in a lower premium.
Make sure that the company you choose is registered as a financial services provider.
Check if you already have credit life cover
Many credit products such as credit cards, personal loans, vehicle finance and home loans are sold with credit life cover policies. The premiums are included in your instalment and the contracts are often signed together or are part of the credit agreement.
You can confirm whether you have credit life cover by contacting your credit provider such as your bank or finance company and asking them for the details and policy document of your credit life insurance for a particular debt.
Know the details of your credit life cover
There are different kinds of credit life cover policies, offering different benefits and with different terms and conditions and different premiums. For example, some policies have waiting periods for retrenchment claims, some have decreasing premiums as your debt reduces. Some charge the maximum premium allowed in terms of legislation, some charge lower amounts than the maximum.
Always go through your credit agreement in detail to make sure you understand what it covers and pay special attention to the following:
Does your policy offer cover for a range of situations such as disability, critical illness, retrenchment, partial loss of income and death? Think about which situations you need cover for and make sure your policy includes these.
Also check to see how much of your debt is covered. Some policies cover the debt in full, some will cover payments for a period of time, such as a maximum of 12 months instalment payments in the event of retrenchment.
Policies have waiting periods for when you can claim. For example, a 90-day waiting period for a retrenchment claim means you cannot claim any benefits if you are retrenched in the first 90 days of the policy. Policies may also have waiting periods for pre-existing health conditions such as heart disease. Always ask about waiting periods on your policy so you know when claims will and will not be paid.
This is when a policy will not pay out at all. An example might be that benefits won’t be paid if you lose your income because you were involved in committing a crime or illegal activity.
Most policies are available to people aged 18 to 65, so check what happens when you reach this age and if your cover changes or falls away.
Many credit life cover policies offer full cover to permanent employees and partial cover, such as death cover, only to the self-employed. If your employment type changes, always check how this affects your credit life policy.
Go through your policy to see when you can claim
How and when claims are paid
Ask how you can claim, when you can claim, and how claims are paid – they are usually paid to the credit provider. Enquire about common reasons for claims being rejected.
Credit life policies issued after August 2017 can charge a maximum amount of R4.50 for each R1 000 owed on ordinary credit agreements such as credit cards, personal loans and vehicle finance. Credit life policies for mortgage loans can charge a maximum amount of R2 for every R1 000 owed.
There are many different credit life cover providers and some premiums may be less than this. Policies issued before August 2017 can charge more than the maximum. If your policy is priced at more than the maximum, ask your provider for a lower rate or see if a new provider will offer you similar cover at a lower rate.
Reduction as debt reduces
Most premiums reduce as the debt reduces but be sure to check this. You don’t want to pay more than you have to.
When and how it’s paid
If your credit life policy is not part of your finance agreement, check how and when the premium is paid and what happens if you cannot pay the premium.
The premiums on credit life policies aren’t high, but the value they add is! It’s worth taking your time and going through the details of your debts and credit life cover agreements to find out when you are covered and how to claim. And if you aren’t covered, find out how you can take out credit life cover for your debts.