When you take out credit, your creditors will require you to pay back what you owe no matter what your circumstances are.
This is why they have credit life cover built into their loans to ensure you are still able to pay off your debt, should any unfortunate event occur. This creates confusion for those who already have life cover which also ensures that you can pay off your debt when you cannot work.
So, do you need credit life cover when you already have life cover? To answer that question, it’s important to know the purpose of both covers.
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Life cover gives you the assurance that your family’s living expenses and education will not suffer, even if you’re no longer there to provide for them financially, says Vera Nagtegaal, executive head of Hippo.co.za.
Life cover can help your family continue their standard of living, help pay the bond or rental costs, pay for additional funeral costs, and repay outstanding debts, she adds.
There are two ways you can use your life insurance to pay off your debt. One is using the pay-out from your life insurance to settle any remaining debt. The other way is to cede your life insurance to your creditors – that is making them beneficiaries of your policy.
On the other hand, credit life pertains to insurance taken out to cover a specific line of credit or debt. For example, your credit card, a loan, or credit shortfall on your vehicle finance.
It ensures that creditors still recover their funds when you are unable to work due to disability, retrenchment, or death, says Nagtegaal.
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Credit life cover |
Life cover |
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This policy is designed specifically to cover your debt when you get retrenched, disabled, or when you die. |
This is income protection. It is meant to help pay for any expenses when you are no longer able to earn an income. |
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Credit life is only paid out to the creditor because it is meant to pay your debt. |
Life insurance can be paid out to any beneficiary of your choice and they can do whatever they want to do with it. |
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Your credit life cover decreases with your debt. It can’t exceed the amount you owe. |
You have a choice to choose your cover amount, depending on your needs and what you can afford on monthly premiums |
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Your service provider is not allowed to charge you more than R4.50 for credit life insurance. That is for every R1,000 you owe. |
Your premiums will mainly be determined by your age and your health. |
Is credit life insurance compulsory?
In its research in 2016, the Credit Ombudsman found that many people were paying for a product that they were not even aware they had. This is because the creditors did not bother to inform the consumers about the product.
According to Nagtegaal, purchasing credit life insurance is your choice, but this also depends on the credit provider. The law states that creditors can propose that you purchase a compulsory credit life insurance, especially for unsecured loans. However, you do not have to accept your creditors policy. You can swap the policy for one of your choice.
Nagtegaal says the most important thing is that you always double check that your cover is appropriate and valid for your specific needs.
Should you buy both?
If you have life cover, you don’t need to take out credit life cover, says Nagtegaal.
However, if it is a specific requirement by the credit provider or you want your life cover benefit to cover your family’s living expenses rather than cover your debt, which the credit life could then cover, then you can purchase both.
She says when considering whether you should take both or only one type of cover, compare your life insurance cover with your specific financial needs. If you have sufficient life cover it may not be necessary to take out credit life cover.
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