Consumers missing out on benefits of credit insurance
Most consumers who have credit life insurance don't know what it is, what it costs them, or where to find their credit life policy.
This is according to Warren Collocott, the chief operations officer at Switch2, which is one of the new providers of credit life insurance.
Nkazi Sokhulu, the chief executive at Yalu, another new player in the market, says the situation is worse than that: "Most consumers with this cover don't even know they have it."
If you have a personal loan, vehicle finance, a home loan or furniture or appliances that you've bought on credit, then you probably have credit life insurance. This is insurance that covers your debt in the event of you dying, becoming disabled or getting retrenched before you've paid off your debt in full.
In terms of the National Credit Act, a credit provider may insist that you take out credit life cover. But the credit provider can't insist that you place your cover with any particular insurer. The choice is yours.
Sokhulu says consumers' ignorance is costing them dearly, as the low claims ratio of under 10% in the credit life insurance market indicates they are not claiming. A claims ratio shows the amount paid out in claims as a percentage of premiums collected.
For the past five years, premiums paid by consumers of credit life insurance have amounted to about R15-billion a year, yet insurers pay out claims amounting to only R1.5-billion a year, Sokhulu says.
There has been widespread abuse of consumers of credit life insurance in South Africa, prompting the government to impose regulations on providers of this type of cover. One of the key features of the regulations is the cap on the premium that you can be charged.
The introduction of the cap - of R4.50 per R1000 of cover - means that if you are paying more than that, you should consider moving your cover to a provider that charges in line with the regulations. The regulations do not apply to policies that were already in force when the regulations were introduced. But there is nothing stopping you from switching to another provider.
The regulations say that you may exercise your right to substitute a credit life policy at any time after the credit agreement is entered into and the credit provider "must" accept such substitution provided that the new policy offers "at least" the benefits referred to in the regulations.
To illustrate what you could save by moving to a cheap insurer, Yalu offers the following example:
If you took out a personal loan of R100 000 that was repayable over three years, and you are paying for credit life cover at a cost of R8 per R1000 of cover, this insurance is costing you R800 a month. That means that over three years, it will cost you R28800.
But if you paid R4.50 per R1000 of cover, it would cost you R16 200 over the term of your loan. That's a difference of R12 600, which would be better spent paying off your loan and reducing the impact of compound interest.
Switch2 and Yalu offer a single policy to cover all of your credit life obligations and both charge premiums on a reducing-balance basis.
This means that as your debts decrease, your premium reduces. Some insurers charge a level premium so that you can budget for a fixed amount for insurance for the duration of the term.
Aside from the cost-saving of having one policy (one debit order and one admin fee), another benefit is the simplifying of your personal finances: instead of having to keep copies of multiple policies, you will have only one, which also relieves your dependants of having to deal with multiple insurers in the event of your death.
Complain if insurer ignores your wish
You must complain if you try to exercise your right to move to another credit life insurer and the insurer fails to act on the instruction to cancel the policy, Nkazi Sokhulu, the chief executive at Yalu, a credit life insurer, says.
Sokhulu says this happens often and insurers "typically just ignore the consumers' request to cancel".
When an insurer ignores your instruction to cancel a policy, you must lodge a complaint with the insurer.
If you aren't satisfied with the way your complaint is handled, you can lodge a complaint with the Ombudsman for Long-term Insurance. Most providers of credit life insurance are life assurers, so the product is governed by the Long-term Insurance Act.
But, some players in the market are short-term insurers, in which case you would have to complain to the Ombudsman for Short-term Insurance if the insurer refuses to let you change insurers.
The Financial Sector Conduct Authority (FSCA), formerly known as the Financial Services Board, has credit life insurers in its sights. Business Day, a sister publication of Sowetan, recently reported that the FSCA would probe "point-of-sale products", such as credit-life insurance, which are frequently mis-sold to individuals who did not need them. The report said the FSCA may order insurers to reimburse consumers the premiums they have paid for products that have been wrongly sold to them or that have delivered little value.
In 2015, the Lewis Group was taken to the National Consumer Tribunal for selling unemployment insurance to borrowers who were pensioners and self-employed and could not claim the benefit.
Lewis was also selling cover for occupational disability to pensioners who were no longer working. This type of cover pays out only if your disability results in you not able to continue with your occupation.