Planning & Life Risk

You Cannot Manage What You Do Not Understand

By: Nonkululeko Sibanyoni

Credit Life Insurance

Since the announcement of Covid 19, we have persistently witnessed markets plummet as countries implement measures to curb the spread of the virus. The outbreak is unlike any and has had a dire social impact on humans and the economy especially on the vulnerable industries such as travel and tourism, manufacturing, retail and fast foods. The ramification of the of the national lock down has directly affected consumers and business  ability to generate and earn an income , as a result some businesses and consumers will have to default on their credit obligations or resort to the ‘payment holiday relief offered by major banks. 

This article will explain how credit life insurance can be used as an alternative resort to the payment holiday plan offered by banks , especially for  medium- low income earners .The paper will explain  how credit life insurance  can provide support for consumers to maintain continuity, monitor fiscal  exposure and overcome practical financial difficulties caused by  the restrictions on movement. 

Credit life insurance is defined by the National Credit Act 34 of 2005 as:  

cover payable in the event of a consumer’s death, disability, terminal illness, unemployment, or other insurable risk that is likely to impair the consumer’s ability to earn an income or meet the obligations under a credit agreement.”

The final Credit Life Insurance Regulation which was published by the former Minister of Trade and Industry Rob Davies In 2017 further provides that:

“(2) Subject to sub -regulations (3) to (5), the credit life insurance cover must provide

for at least the settlement of-

(a) in the event of the consumer’s death or permanent disability, the outstanding balance of the   consumer’s total obligations under the credit agreement.

(b) in the event of the consumer temporary disability, all the consumer obligations under the credit agreement that become due and payable 

(i) for a period of 12 months.

(ii) during the remaining repayment period of the credit agreement; or

(iii) until the consumer is no longer disabled,

whichever is the shorter period; and

(c) in the event of the consumer becoming unemployed or unable to earn an income, other than as a result of permanent or temporary disability, all the consumer’s obligations under the credit agreement that become due and payable

(i) for a period of 12 months.

(ii) during the remaining repayment period of the credit agreement; or

(ììí) until the consumer finds employment or is able to earn an income, whichever is the shouter period.”

(3) Subject to sub -regulation (5), where a consumer is not employed on the date that the credit life insurance policy is entered

(5) Where a consumer is self – employed in the formal or informal sector, or employed in the informal sector on the date the credit life insurance policy is entered into, the credit life insurance policy may include the cost relating to the risk of the consumer being unable to earn an income other than as a result of retrenchment or occupational disability.

This regulation  read  with the  National Credit Act 34 of 2005 ,  principally  requires that the  insurance policies that form part of the  credit  agreements concluded after the effective date of 10 August 2017 to now cover death , permanent disability ,  unemployment and any other   risks that are likely to impair the consumer’s ability to earn an income or meet the obligations of the credit agreement.  Individuals who are self-employed and persons employed in the informal sector also fall within this criterion as seen in sub regulation (5) of the Credit Life Insurance Regulation.

We have seen how the measures  put in place by the government to prevent the spread of the virus has caused an impairment to a lot of business’s ability to generate an income or meet credit obligations as a result of not trading .  The rapid spread of the virus has also placed those who have contracted it and those avoiding falling victim to it in a position of not being able to work. As  a debt protection tool credit life insurance primary purpose is to  protect  policy holders  through expunging the burden of repaying debt that are due and payable  by paying out  for  a period of 12 months  , remaining repayment  period of the credit agreement or until the policy holder finds employment or is able to earn an income .  

You Cannot Manage What You Do Not Understand 

Over the years we have seen how access and the ease of obtaining credit has increased.  Consumers have been offered   credit by way of top ups/revolving loans and overdrafts facilities.  A trend has also been seen where credit providers confront consumers with unsolicited offers towards the end of their repayment’s terms. With this growing need for credit, the requirement for security in a form of Credit Life Insurance also became apparent to protect the credit provider against defaults on repayments.  At first glance, the credit life insurance product may be seen as one of many assumed opportunities for credit providers to earn additional fee income through commission and administration fees. It   is however more than that and its benefits can only be understood and appreciated when its vital risk management tool is utilized by the policyholder. 

Consumers who are well acquainted with this information have   widely confused credit life insurance with cover that is available in the event of death only, consequently policy holders do not turn to it when the need to arises.  The low claims ratio in the credit insurance market is indicative of the large unawareness by credit holders of this invaluable benefit

To determine if one falls within the qualifying  criteria to claim for credit life insurance , consumers should  check the  monthly statements issued by the credit providers for an insurance premium or account protection plan fee which would have been payable since the inception of the credit agreement. Another qualifying criteria is that the   credit holder should have been maintaining the credit payments prior to the insurable risk event in accordance with the stipulations of the credit agreement.  

While economic measures have been employed by government to salvage the financial system and lesson the   afflicts of the virus, anxiety around the sustainability and resurgence of the economy after the outbreak remains. Credit life insurance has not been necessitated by the heightened uncertainty caused by Covid 19. The pandemic has, as a matter of fact highlighted its need as well as the importance and exigency for accessibility to affordable insurance.  Credit life insurance is also not being presented as a key solution to the volatile economic damage the Covid 19 epidemic will have but is rather presented as tool to help consumers and businesses manage the impact. 

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