Credit Life Insurance

Economic advisers are quick to point out that debt is the single biggest obstacle to wealth. And although there are perhaps some merits to this statement, it certainly does not always ring true.

For instance, for the overwhelming majority of South Africans it is impossible to gain equity without getting into some form of debt first. A good example of this is property. You may have had to take a 100% mortgage to afford your dream home. Over time, the value of the property increases and the amount you owe on your mortgage decreases. The difference between your appreciated property value and your outstanding mortgage is equity.

Managing your debts – regardless of whether it is your mortgage or your credit card – goes beyond making diligent repayments every month. It also involves ensuring that the risks surrounding the debts are properly addressed, with the two greatest manageable risks being disability and death.

This is where credit life insurance comes into play.

What is credit life insurance?

Credit life insurance is, strictly speaking, a decreasing term policy that you will take out to cover the risks of a specific debt. As your debt reduces year on year, this type of life insurance policy reduces the amount of life cover you have, on a fixed scale year after year. It is important to take note that should you die or become disabled, only the current debt will be covered, and not the arrears.

Credit life insurance and your health

Unlike most life insurance policies, you will not be required to provide evidence of good health. On the application form, there is a section that asks you to disclose any medical conditions you are suffering from or that you may have suffered from in the past.

It is important that you are absolutely truthful when completing this section. The insurance ombudsman, who deals with complaints related to the insurance industry, reported that many of the complaints received during 2007 were for claims not being settled as the result of the policy holder failing to truthfully disclose his or her medical history.

When is credit life insurance necessary?

When you wish to finance a big ticket purchase, such as a motor vehicle, the lender will only approve the credit if you have adequate credit life cover in place.

Credit life insurance is also essential (albeit not necessarily compulsory) to cover your other instalment debts and lines of credit, even if the lenders do not make it compulsory. If you die without having credit life insurance in place, it will be up to your family to settle your debts at a time when they will have to deal with the many expenses associated with your funeral and the winding up of your estate. Should you become disabled, it will not necessarily invoke any benevolence on the part of the lender either. You will still have to repay the debt or risk your assets being attached.

Buying credit life insurance

Here you need to exercise some caution. When you enter into an instalment agreement, the bank or lender will offer you their credit life insurance product. In principle there is nothing wrong with that. But, there may be some risk. According to the insurance vice-ombudsman, Ms. Jennifer Preiss, there have been an increasing number of complaints from policy holders with respect to the way in which these policies are sold to them by the banks. According to Ms. Preiss, the credit consultant is not necessarily sufficiently experienced or trained to provide guidance to consumers.

Hence, you may want to shop around first before making a decision on whether to purchase the bank’s product or not. Also make a point of studying the fine print when you do a comparison. It is important that you understand what is included and what is not.

To conclude

In view of the fact that credit life insurance is not expensive, does not penalise you for your health and adequately addresses the risks of death and disability, it is something nobody who has debts to service should be without.