Life Ombud: Loans

BACKGROUND

The policyholder had taken out a policy in 1988 for a premium of R80 per month. She took a loan on the policy of R1 818,58 on 27 August 1992 and in terms of the loan application the insurer could charge interest at a rate in its discretion and change the rate without notification. She never repaid the loan. In 2008 she received a loan notification advising her about the loan. According to her this was the first time she received such a notice. Together with interest the loan had grown to R34 526,60. The net surrender value of the policy was R12 938.

The complainant was most unhappy with the loan amount as she said that she had taken out the loan because she had heard that such cash loans were available. (She had not realised the consequences). She was displeased because the insurer had not kept her advised about the loan and that after paying premiums for 22 years her policy had minimal value. She also questioned why the in duplum rule had not been applied.

The common law in duplum rule stipulates that interest stops running when unpaid interest equals the outstanding capital of a debt. The Insurance Act 27 of 1943 had exempted policy loans from the operation of the in duplum rule. Although the exemption was brought to an end in the new Long-term insurance Act, which became effective on 1 January 1999, the old Act still applied to this loan.

The insurer advised her that she could repay the loan over the remainder of the policy term of 10 years by paying R551 a month. If she accepted this proposal she would have to pay R66 120 over that period. She complained to our office.

RESULT

The insurer at first resisted all attempts on our part to obtain a concession to reduce the balance owing on the loan. After the matter was escalated to general management there was an acceptance that the complainant was understandably aggrieved in the circumstances and as a gesture of goodwill, and to retain her business (she had other policies) an offer was made. The insurer offered to treat the loan as if it had been a part surrender. If that was done the gross surrender value of R49 121,68 would be R11 423,16 lower but the loan would fall away. (This basis was used because it appeared that the complainant had somehow been under a wrong impression that that was the nature of the transaction). This increased the net surrender value from R12 938 to R37 698.

The complainant accepted the offer.

CAUTION

To Insurers

Our office regards it as vitally important that policyholders should be made aware, when taking it, that it is a loan and what its terms are and kept informed about details of their policy loans. In terms of section 18 of the Policyholder Protection Rules an insurer must send quarterly statements to policyholders who have loans indicating the amount of the loan, the accrued interest in relation to the value of the policy and the applicable interest rate.

An insurer must also notify the policyholder when the loan is about to equal the value of the policy and when benefits terminate under the policy because thereof.

It is a legal obligation for insurers to send out these notifications. (The National Credit Act also now requires such notifications). Our office is obliged to notify the regulatory authorities if we become aware of non-compliance with provisions of section 18.

To Policyholders

It is important for policyholders to be aware of the implications of making use of policy loans and whether interest is being charged on the loan.

Policyholders with existing loans should assess their situations and seek financial advice. It may be in their best interest to repay the loan as interest is often charged at well above prime interest rates on policy loans and the in duplum rule does not apply to loans granted prior to 1 January 1999.