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Credit Life Insurance Explained

Credit Life Insurance

Credit life insurance plays an important role in promoting access to finance. It is important to protect you and your family from the burden of outstanding debt. It covers outstanding debt should the consumer be unable to pay it off due to unforeseen circumstances. 

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Credit life insurance can be taken out when credit is granted, either from a credit provider or a different insurer. The National Credit Act 34 of 2005 defines credit life insurance as “cover payable in  the  event  of  a  consumer’s death, disability,  terminal  illness, unemployment, or other  insurable risks that  is  likely  to impair  the  consumer’s  ability  to  earn  an  income  or  meet  the  obligations  under  a credit  agreement.”

A consumer is not obliged to take out insurance with the credit provider granting credit and may choose to purchase it from another insurer. Generally, debts such as personal loans, mortgages, installment sale agreements, credit cards, or store cards are covered. 

However, there are certain cases that exclude or limit cover, including:

  • Resignation 
  • Retirement
  • Dismissal from employment due to misconduct 
  • Loss of income due to retrenchment within the first three months after the commencement of  cover 
  • Voluntary retrenchment 
  • Where the consumer participates in an unprotected strike
  • Where the consumer takes out life insurance with the knowledge that his or her employment will be terminated soon

Thus, the insurance covers credit repayments the consumer is unable to pay for in instances where the consumer is unable to earn an income due to unforeseen circumstances. 

In some cases, consumers already have credit life insurance without knowing it, since the premium might be included in the credit cost. Thus, it is important to go through the terms of your credit agreement. 

Rights of Consumers

Prior to 2017, credit life insurance was not strictly regulated. This lead to many credit providers charging exorbitant fees for credit life insurance. In August 2017, new regulations came into effect to offer more protection to consumers. Credit providers are required to comply with these new regulations. Thus, consumers should take note of the applicable regulations to ensure they do not pay more than they should. 

  • The credit life insurance regulations state that  “…a monthly credit insurance limit of R4.50 for each R1,000 owed on all credit agreements except mortgages. Ordinary mortgage agreements have an R2 limit for each R1,000 owed. In practical terms, a mortgage agreement of R700,000 should carry a maximum monthly credit life insurance premium of R1,400.”
  • Consumers are also entitled to substitute a credit policy with another if the benefits are more favorable. It is also important to note that credit providers may require consumers to take out credit life insurance for the duration of a credit agreement. 
  • A credit life policy must cover a consumer’s entire debt. 
  • Consumers are not to be charged interest on their premiums. 

Chane Henney

Chane holds an LLB and is currently in the process of completing an LLM. She has in-depth knowledge of the debt review processes, debt consolidation, and applicable legislation such as the National Credit Act.