Do you know what credit life insurance covers you for and what the key differences are between credit life insurance and life insurance? Many people believe that if they have life cover, then they don’t need credit life insurance. However, credit life, which takes care of your outstanding debts should you be unable to service them, fulfils a different role to that of life insurance. Both meet important needs in your financial planning, so it should never be a case of trading one off against the other.
Yalu, a new digital insurer that offers credit life insurance, offers some practical guidelines on the difference between life Insurance and credit life insurance, and what needs they address.
|Credit Life Insurance||Life Insurance|
|What does it cover?|
|Should you be unable to repay your loans due to death, disability or retrenchment, a credit life policy will take care of your debt to the bank or creditor. It pays the total remaining balance of the loan in the event of death or permanent disability of the policyholder or pays monthly loan instalments in the event of temporary disability or retrenchment. It protects you and your loved ones from the enormous strain of having to settle a debt when life circumstances may place you in a position where you simply are unable to.||A life policy covers the policyholder for death and pays out to the nominated beneficiaries. It can be paid out in a lump sum, or a monthly amount, and is used to support beneficiaries with their future financial needs after you are gone. The purpose of life cover is to ensure that there is enough money to continue providing an income for your family in the future when you are no longer around to provide for them. While Life cover pays out upon death of the policyholder, many providers are now tagging on additional benefits or riders like disability and critical illness at an additional amount added to the premium.|
|How much does it pay out?|
|The policy pay-out is capped by the insurer to the value of your outstanding loan and is paid directly to the creditor or loan provider to settle your debt. You cannot have more credit life cover in excess of your liability at any time.||Life insurance is tailored to the amount you need to meet your family’s lifestyle needs and your budget, and this is usually calculated by a qualified financial advisor who will do a needs analysis and advise you of how much cover you need.|
|How will the claims be paid out?|
|Your credit provider is the loss-payee or “beneficiary” on a credit life insurance policy. This means that, in the event of a claim, the sum insured will be paid to the credit provider directly to settle your loan obligation. These funds can only be used to settle your insured, outstanding debt.||Life insurance will pay out directly to the nominated beneficiaries. If your life insurance policy has been ceded to the bank as security for a large debt, like a bond/mortgage, the mortgage provider will be paid directly by the insurer. A selected beneficiary appointed by the policyholder receives all of the funds of the life policy and is free to do with this funding as they choose.|
|How much do the premiums cost?|
|New credit life regulations came into play in August 2017, capping the premium rate at R4,50 per R1000 borrowed. The capping of rates only applies to loans issued post August 2017; so if your loan predates this, you may be horrified to find that you’re paying as much as R15 or more per R1000. You do not have to be overpaying for your credit life insurance; you can now switch for a better rate, rewards and the same level of protection you have enjoyed all along, to Yalu. And because you should not be paying for more cover than you need, Yalu’s premiums also decrease as your outstanding debt to the bank decreases, so you only pay for the cover you need and not a cent more.||The monthly premiums are calculated on the required insured amount by the insurer in a process called ‘underwriting’. This means that premiums are based on your unique risk profile such as age, health, lifestyle, pre-existing health conditions and so on. Because this cover is intended to take care of your loved ones in the long term, your insured sum and hence premium will usually increase with inflation every year. The sum insured should also be adjusted when you have a major change in your lifestyle and financial needs, for example a growing family, buying a house and so on.|
|Is cover mandatory and can I have both?|
|A credit provider can insist that you have a credit life insurance policy for the duration of a credit agreement, but they cannot insist that you take your cover with them. You have the right to shop around and get the best rates and cover for your needs. You can also extend your existing Yalu credit life policy to all your loan requirements, saving on unnecessary admin fees and debit order costs of having multiple policies if you have more than one loan.||Life cover is not mandatory, and the need for it is very much dependent on your unique lifestyle, and whether you have dependents who rely on you. If you have dependents, you should always have life cover in place so that if you pass away, your family will be taken care of financially. If anyone relies on you financially for their livelihood, you need life cover.|
Nkazi Sokhulu, CEO and co-founder of Yalu explains: “Life insurance covers the important current and future needs of your loved ones if you pass away and are no longer around to look after your family, ensuring that their daily living expenses such as housing, groceries, education and so on are taken care of, for the long term. Credit life insurance is different in that it is designed to protect you and your loved ones from the strain of having to pay off any credit debts when circumstances such as death, disability or retrenchment may prevent you from doing so. It protects your interests, as well as the loan provider.
“Although they serve very different needs, credit life and life insurance have a complementary role in your financial plan. By having credit life insurance to cover your outstanding debts, you can ensure that should you pass away, your life cover is not depleted by having to pay off credit providers first, and that it goes towards its original and very important purpose of providing for the schooling, groceries, transport, housing and future financial security of the ones you love. Also remember, credit life insurance will also service your outstanding loans if you become disabled or retrenched, while life cover only pays out on death to your beneficiaries. Both credit life and life insurance are invaluable financial planning tools, and it’s important that you understand the role of each in your financial plan,” concludes Nkazi.
(** This article and its contents do not constitute financial advice.)
For more information go to www.yalu.co.za