Everything you need to know about credit life insurance
So, you've entered the working world. Finally, you're earning your own money. Now, you're in the position to start applying for a credit facility to fund larger purchases like a vehicle or home or to take out a credit card to build a positive credit history (if managed responsibly, of course).
However, life is uncertain – nothing has demonstrated that better than the events of the past three years. That said, it is critical to consider what might happen should you no longer be able to cover your debt obligations.
This is where credit life insurance comes into play. "Credit life insurance is one of the various types of insurance cover available and is designed to cover the outstanding balance of your debt should you pass away, become disabled, or be diagnosed with a dreaded disease,” explains Muzi Khumalo, Credit Life Insurance Portfolio Manager with Standard Bank Insurance. "In most instances, this insurance is directly linked to your loan or credit facility, meaning it has a specific purpose – to cover your debt when the unthinkable happens."
While any outstanding debt obligations can be covered by a life insurance payout, Mr Khumalo explains that the life insurance lump sum will only be paid out to your beneficiaries or your estate after death. "However, it is advisable for customers ensure that their debt is covered by credit life insurance so that the life insurance death benefit or lump sum does not have to go towards covering your outstanding debt but rather to ensuring your beneficiaries can maintain their standard of living and do not find themselves in a difficult or pressured financial situation where they may have to cut back on essentials and critical expenses such as education, for example."
Different types of credit life insurance
Mr Khumalo says that different types of credit life insurance are available, and the type of insurance depends on the borrowing product you select. He says that it is possible to get credit life insurance on most credit facilities, from a home loan, and vehicle asset financing to credit cards, student loans, and personal loans.
In some instances, pricing structure or premium customers pay for this cover, will be determined by the loan balance. However, as you pay down the loan over time, the cost of the cover will be reduced too. In other words, the faster your loan is paid off, the sooner your premiums for your credit life insurance will come down. Mr Khumalo says that some insurance providers also offer a fixed-level premium, which is calculated on your capital loan amount as per the initial agreement and consolidated into your loan repayments.
How much will be paid out?
According to Mr Khumalo, the size or value of the payout will depend on the type of credit life insurance policy that you end up taking out. "It's not a standard product and can be customised to suit your unique circumstances and financial position. There are policies that exclusively offer a death benefit, while others offer a mix and variety of benefits such as death, disability and dread disease, retrenchment, and/or temporary disability."
He says that the size or value of the payout will differ from policy to policy and is largely dependent on the benefit that needs to be paid out. "Typically, a credit life policy with death and dread disease cover will settle the balance on your loan whereas temporary disability, retrenchment or loss of income cover will pay out for a certain period of time, which is typically limited to about 12 months, to ensure your instalments are covered."
Top considerations when taking out credit life insurance
Mr Khumalo says that credit life insurance is one of the most widely available insurance products out there, with over 90% of the big financial services providers, like banks, in the country offering the cover to their customers. He adds that it is one of the most appreciated and popular forms of cover among clients, as it serves as an essential lifeline for your loved ones, should something happen to you, in what is already a challenging economic environment in which most households find themselves stretched financially.
He explains that in some instances, a lender may insist that a borrower has credit life insurance in place before granting or supplying them with the desired credit facility. This does not necessarily mean that you, as the borrower, must take out credit life insurance with that specific lender. While it may be mandatory to have the cover in place, you do have the opportunity to shop around and compare coverage for your credit facility and decide based on what you can afford.
However, he advises customers to make sure that they understand exactly what type of benefits are offered by the cover and note any specific exclusions to ensure that you are not caught off guard or left without protection should something unfortunate happen. Essentially, you want to make sure that you are covered for any and every eventuality, he says.
He advises anyone taking out a credit facility to seriously consider credit life insurance to ensure that your loved ones do not have to dip into hard-earned savings or, worse, take on further debt to cover or meet your debt obligations. "As you charter your career path, you will work hard to make your someday dreams like owning a vehicle or home a reality. These assets must be protected in some way or another and credit life insurance is a sure way to protecting these assets and avoiding a scenario where your loved ones are burdened financially to cover the cost of these assets should the unthinkable happen."
