In a time that many people are cash-strapped and over-indebted, bounced debit orders in South Africa have grown to epidemic proportions. Of almost 31 million debit orders amounting to R72 billion that are processed each month, 1.2 million debit orders are unpaid, according to data from the Payments Association of South Africa (Pasa).
In the case of unpaid debit orders relating to life, disability or dread disease cover, this can have serious implications for the policyholder.
What is a debit order?
A debit order is a means for a third party, to whom you have given permission, to collect money from your bank account on a regular basis. It’s hard to believe in this high-tech age, but there was a time when most people went into their bank branch in order to pay their premium with cash. Today many service providers from your insurer and medical aid provider to your gym and DStv insist on payment by debit order.
There are costs attached to debit orders. You have to pay the cost of opening and maintaining a bank account, and there is the cost of processing each debit order.
What can go wrong?
The most common reason for non-payment of a debit order is that there’s not enough money in the account. People who are not on a fixed monthly income sometimes have money deposited into their bank accounts at different times of the month. In this case, policyholders should ensure not all their debit orders are processed on the same date, but spread over a period of time to manage cash flow. Most insurance companies allow you to select a monthly debit order date that suits you, usually the 1st, 7th or 15th of the month.
Changing your bank account can also disrupt your payment schedule. If you change your bank without notifying your insurance provider, the debit order will be rejected. Debit orders are fully automated and therefore you cannot expect to notify your insurer the day before payment, or even a week before. You should give 10 days’ notice of a change in bank details.
Top tip: A new bank account is not the only life change you should be sharing with your provider! Here’s a complete list.
What happens if your debit order is unpaid?
If your debit order is declined by your bank, you will be charged. This charge varies from bank to bank, but the cost could be as high as R115.
An unpaid debit order has serious consequences for your policy. Dave Shell, director of South African Pension Fund Trustees (Pty) Ltd, explains that an insurer is obliged, under the Short-term Insurance Act’s Policyholder Protection Rules, to provide clients with a grace period for the payment of a premium which is not less than 15 days after the initial debit order date before your policy is suspended. If you don’t pay within the 15 days of grace allowed, you don’t have cover.
Shell explains that it may take a few days for the payment to be rejected and more days for the insurer to be alerted to this fact. Therefore, you may only be notified that your premium has bounced as much as two weeks later.
The sheer volume of unpaid debit orders means the insurer cannot individually contact each policyholder, and will simply process a double debit order in the succeeding month. You may be left without cover between the end of the grace period and the processing of the double debit order.
He says, “Most unpaid debit orders are rejected for lack of funds – and if the individual cannot pay one premium this month he is unlikely to be able to pay double the next month. We advise our clients to somehow raise the cash to ensure the double premium is paid the following month.”
If the subsequent double debit order is also unpaid, then the policy may be suspended and placed in a state of lapse. “This has the implication that even if the individual subsequently catches up the premium, the insurer may decline to reinstate the policy, or may first request a declaration of health. The policyholder may by now be older and less healthy than when the policy was originally taken out, and he may struggle to get life cover,” explains Shell.
Shell says that the first reaction for many people unable to meet their monthly premium is to want to cancel their policy. Shell always tries to dissuade policyholders from this option, because it may be much harder to subsequently get the same (or any) policy if their health has deteriorated.
“They saw the logic at one time in having a policy, so we encourage them to make every effort to find a solution which enables them to remain covered, and therefore financially more stable,” he says.
No insurer is obliged to pay out a claim on a life policy where the policy is terminated or even suspended due to non-payment. Shell explains that this happens more often than one might think. A person who is seriously ill or injured may not be conscious to ensure the premium is paid. By the time he/she passes away, the policy may have been terminated. Shell advises: “Put some mechanism in place to ensure your debit order continues to be paid even if you are incapacitated.”
Top tip: Download and print the Beneficiary Instruction Sheet and share it with your family. Explain to them how they can ensure your policies do not lapse if you are ill or incapacitated.
Because the policyholder typically has a total grace period of 30 days within which to pay the premium, even if the premium is unpaid and the policyholder dies within the grace period a family member could pay the outstanding premium and the policy would pay the benefit – everything else being in order, says Shell.
Having life, disability or dread disease cover is a core part of financial sustainability. Making sure that your premium is debited every month will ensure that you are covered.