FIA: Credit life insurance option may cost consumers more than expected

Peter Atkinson, National Technical Portfolio Manager at the Financial Intermediaries Association of Southern Africa (FIA)

When a consumer arranges financial assistance in the form of credit for a purchase - whether via a credit card or retail store account - it has become common practice for the institution to offer some form of life insurance to ensure that the outstanding

However, according to Peter Atkinson, National Technical Portfolio Manager at the Financial Intermediaries Association of Southern Africa (FIA), while it is good to ensure financial security, having multiple policies with each institution can easily end up being a far larger cost for the consumer than if the total sum was covered in a broader life insurance policy.

Atkinson notes that although the sales pitch from the institution highlights the advantages of such an arrangement to the borrower, the lender also benefits from the arrangement. “Not only does it provide an added measure of security for the lender, as it ensures any debt will be paid, it also provides additional source of income from the insurance sale.”

“This type of insurance, which is generally referred to as ‘credit life insurance’, may in fact be more advantageous to the institution than the consumer at the end of the day.”

Atkinson says all outstanding debt should be taken into account in a consumer’s overall financial planning when calculating the appropriate level of life cover that is required, as debts need to be settled in full on death. “However, arranging cover on the basis of a number of small decreasing term insurance policies, each attached to a particular loan, is not the cheapest way of doing this, even if it does usually have the advantage that no medical underwriting is required.”

The reason for the higher costs is partly because of the lack of underwriting, which means the premium rate has to be increased to allow for potential poorer risks, but also because of the administration costs associated with taking out a number of separate policies, says Atkinson. “In some cases the premium may be further increased by the addition of extra forms of cover that pay out on disability and even retrenchment, where the outstanding balance of the loan is settled if one is retrenched and unable to find alternative employment.”

The better way of making provision for this would be by increasing the amount in the overall sum insured within a permanent policy that has been taken out as part of an all-encompassing long term insurance plan, says Atkinson. “By doing this, consumers can benefit from buying the life cover at a rate based on their age at the time of taking out the policy rather than being charged a rate based on their age at the time the loan is taken out, which would increase over time.”

“When it comes to structuring a suitable overarching financial plan it is generally best to consult the services of an experienced and trusted insurance broker, rather than relying on the sales pitch of ad hoc credit providers to ensure the most affordable and appropriate cover is taken out,” concludes Atkinson.