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Not all credit insurance policies are created equal

26 May 2020 Anton Davies, Head of Client Solutions at Nedbank Insurance

Be sure to get all the facts before you take out cover or try to claim

One of the key ways in which financial services institutions have come to the aid of South Africans facing financial challenges due to Covid-19 has been to encourage those with valid credit insurance policies to claim their benefits. This means that their monthly debt repayments could be covered by their policy for a period of up to 12 months, depending on the circumstances.

Unfortunately, no two credit insurance agreements are the same, and the type and level of cover available to customers differs from one credit product to another. This fact has created a lot of confusion amongst credit insurance holders, many of whom are becoming frustrated when trying to claim against their policies, only to find that they are not able to do so, or that their cover amount is not what they had hoped it would be. As is always the case with any financial product, when it comes to credit insurance, knowledge is power; so, whether you are thinking of claiming against this type of policy now, or you're considering taking out insurance on future credit agreements, it's worth arming yourself with the correct information first.

To start with, it's useful to understand that the name "Credit Insurance" is a catch-all phrase that is used to describe any type of insurance cover on a credit arrangement. These arrangements can range from unsecured credit like a personal loan, credit card, overdraft, or store card, to secured credit like a home loan or vehicle finance agreement.

Credit Life cover is not always compulsory. Some, but not all, credit facilities or loans will only be offered on condition that the person borrowing the money agrees to take out credit insurance. This is not required by law in South Africa, but many credit providers insist on it before they will provide you with the credit you want. This is known as mandatory or compulsory credit insurance. To protect consumers, the National Credit Regulator (NCR) implemented rules that govern mandatory credit insurance agreements. The two most common types of credit agreements, with compulsory credit life cover in South Africa, are for unsecured lending and affordable housing. The NCR specified the minimum benefits that a mandatory credit insurance policy must offer the policy holder, as well as the maximum premium that can be charged for those benefits.

Possibly the most relevant rule at this time of Covid-19 is that these mandatory policies must include an Unemployment or Unable to Earn an Income Benefit. This is the cover that pays some or all of your credit repayments, if you become unemployed or you are unable to earn an income for a period of time, through no fault or action of your own, which is the general case for many employed people during the Covid-19 lockdown period.

It's important to note that this Unemployment or Unable to Earn an Income Benefit is not required by law to be included in optional credit insurance policies (i.e. where insurance is not a requirement in order to get the credit). In fact, the benefits offered by these optional cover policies come in all shapes and sizes. Some may be pre-packaged, while others could be at the choice of the policyholder. Most of these optional credit insurance policies include a death benefit as their basic building block, and then offer other cover options, such as permanent or temporary disability, retrenchment, critical illness, accidental death, hospitalisation and so on.

While some credit insurance providers do provide the option of including the unemployment or unable to earn an income benefit, this is not widespread. And where it is offered, it often results in much higher premiums than most people would want to pay.

Self-employed people may face added challenges
Unfortunately, even if you have mandatory credit insurance that includes an Unemployment or Unable to Earn an Income Benefit, this cover is usually limited to people who are employed and lose their ability to earn an income. The regulations have a specific exclusion for self-employed people from being able to claim, if they are unable to earn an income. The regulations provided some reprieve in that self-employed people shouldn’t be paying a premium for benefits which they cannot claim on.

The problem lies in the difficulties in defining when a self-employed person can be said to be unable to earn an income. Without such a clear definition, insurers are unable to offer this form of cover to the self-employed. This makes it very important that all self-employed individuals consider other short-term insurance contracts that provide insurance protection for business interruption.

While Nedbank currently only requires mandatory insurance for its personal loans product (Personal Loan Protection Plan), we are very aware of the imperative highlighted by Covid-19 to find innovative ways of providing effective credit insurance cover to self-employed people. We are actively investigating appropriate solutions to this challenge.

Ways in which Nedbank is assisting
In the interim and based on the understanding of the unique challenges created by Covid-19 for all our credit insurance clients, we have responded to the pandemic by relaxing the cover requirements for many of our policyholders. For example, where the policy requires a total loss of income, for the policy holder to be able to claim, we are offering partial benefits to those clients with mandatory cover. To qualify, these clients need to show that they have lost more than 20% of their income directly due to Covid-19. So, instead of receiving no relief, unless there is 100% loss of income, we have allowed partial relief for partial loss of income.

We have also waived waiting periods (for existing clients at the commencement of the lockdown) where claims are a direct result of the Covid-19 pandemic in an effort to get financial help and relief to our clients as quickly as possible. There is no harm in submitting a claim if you are not sure, and we will endeavour to respond as swiftly as possible, to clarify your position.

Bringing it all together
The bottom line is that even though you may have credit insurance in place, this doesn't automatically qualify you to be able to claim from it to cover credit repayments during Covid-19. Your eligibility for this type of claim will depend on the type of credit you have, and/or the specific cover stipulated in your credit insurance contract. It is best to contact your credit insurance provider directly to discuss your options and eligibility to claim.

Nedbank clients with credit agreements or credit insurance contracts through Nedbank insurance, can send an email to [email protected] and our consultants will call them back to discuss their relief options.

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