Article - Maya Fisher-French
The pricing cap on credit insurance is good news for new loans, but many existing credit customers are still paying over the odds.
In August last year, price caps were introduced on how much a credit provider could charge for credit insurance and consumers were also allowed to switch to other independent credit life insurers.
This was done to stop widespread abuse in the industry, where microlenders were using credit insurance as a way to bypass interest-rate caps by charging excessive fees ‒ as much as R56 a month per R1 000 borrowed. There were also headline-grabbing cases where furniture retailers like JD Group and Lewis were mis-selling credit insurance policies.
The new caps have a maximum rate of R4.50 a month per R1 000 borrowed, however it only applies to loans taken since the new rules were introduced. Many consumers who have existing loans are unaware that they have the right to shop around and switch to another insurance provider.
In fact, consumers generally have a very low understanding of credit insurance, despite the fact that they are paying for it each month.
What is credit life insurance?
There are many different names used by credit providers, such as: Balance Protection Plan; Debt Protection Cover; Customer Protection Plan; Basic Insurance Cover; Credit Protection Plan; Insurance; Customer Protect Insurance Plan; Debt Relief Policy; Personal Protection Plan; Account Protection Plan.
No matter what it is called, it is an insurance premium you pay each month that covers your outstanding loan balance in the event of death or disability. In some cases, the cover may also include retrenchment and other benefits.
Sasha Knott, divisional CEO of credit life insurer Switch2, a division of Clientele Life, conducted a survey in which they found that only one in three consumers surveyed knew what credit life insurance was, and of those, 75% thought the insurance they took out with their purchase was free. Overall only 4% could easily obtain and provide a copy of their insurance policy document.
Tlalane Ntuli, co-founder and Chief Operating Officer of Yalu, a newly launched digital insurer that offers credit life insurance, says they have identified a similar trend. “Most consumers with an existing personal loan don’t even realise that they have credit life insurance. The chances are incredibly slim that they even have a policy document or any regular correspondence on their credit life cover – so even if they wanted to change their cover, or get a better handle on how much they are paying and for what benefit, most would not know even where to start, let alone claim if they needed to.”
If you have taken out a loan prior to August 2017 and you are paying more than R4.50/R1 000 a month, it may be worth doing a price comparison with other credit life insurers like Switch2 and Yalu. For example, on a loan of R100 000 with a credit life premium of R4.50 per R1 000 compared with R8 per R1 000, over a loan term of three years you could save R12 600.
Total credit life paid at R4.50 per R1 000 over three years: R450 per month x 36 = R16 200
Total credit life paid at R8.00 per R1 000 over three years: R800 per month x 36 = R28 800
How easy is it to switch insurance providers?
Technically it should be just a matter of filling in a piece of paper as the new insurer handles the admin. However, despite the new rules, insurers are finding that certain lenders and banks are creating hurdles when it comes to switching.
“It’s been early days at Yalu since launching our first offering which covers personal loans for now, but even so we have experienced resistance from the banks when they receive the cancellation request we automated on behalf of our customers. The resistance ranges from banks not responding to the cancellation request for more than two weeks, to asking for extra documentation not required by regulations. Up until now, loan providers have never had to deal with the phenomenon of a client wanting to switch their cover before the end of a loan term. There are many vested interests of existing stakeholders and therefore we can expect substantial reluctance to change,” says Ntuli.
Knott, whose company Switch2 offers credit insurance on all credit products, says they have experienced a similar pattern with requests returned as “declined” as credit providers claim that the new policy is not acceptable to them.
These challenges have been raised with the Financial Sector Conduct Authority (FSCA) and hopefully we should see more co-operation and a more client-focused approach by lenders.
Mellony Ramalho, Group Executive Sales Branch Network at African Bank says that the bank “does allow for substitution of credit life policies, as stated in the NCA section 106” and Capitec confirmed that clients can choose their credit insurance or waive it and substitute with their own policy “as long as it covers the same benefits and is acceptable to us. We don’t prescribe who the insurer must be, but the client must be able to cede the policy.”
Know what you are buying
You do need to ensure that you are comparing like with like and whether you need all the benefits included in the insurance cover.
Does it have retrenchment cover? According to Switch2, retrenchment is the most common reason for claims, making up 78% of all their claims, so if you are employed it is important to include retrenchment cover. However, there is no point in paying for retrenchment cover if you are self-employed or a retiree.
Do the premiums decrease in line with the outstanding balance? Charl Nel, head of communications at Capitec Bank says it is important to make sure your premiums match your reducing balance as they are calculated on the amount outstanding. Capitec reduces their premiums in line with the reducing loan balance, but not all credit providers do so.
What additional benefits do you have? Providers have different add-on benefits, for example Switch2 includes maternity benefits which pays out two months of your debt repayments when you give birth or adopt a child.
What is covered and for how long? It is also important to understand how much cover and what cover you have for the premium you pay. All polices should pay the outstanding balance on death or permanent disability, but the rules changed on retrenchment cover. Prior to the new rules being implemented, most retrenchment insurance only covered up to six months of debt repayments. The new rules require installments to be covered up to 12 months, assuming you have not found a job by then.