The pitfalls of credit life insurance

When you take out a home loan, you’ll need insurance to cover it. The obvious choice might be to get that insurance from the lender … but is it necessarily the best option?

Why you need credit insurance

When you take out a loan – say, for example, a bond or home loan – you’re required to have life insurance to cover it. The rule makes sense: if something dreadful happens and you can’t keep paying your bond, the right insurance cover will enable you to protect your home and family. That’s not just a sales pitch. In the chaos of 2020, many South Africans have lost their incomes; those who had credit life policies had the safety net of some degree of financial relief, if only for a limited time.

But there’s a catch. (There’s always a catch.) Often, the credit provider will pressure you into taking that insurance with them. This is not always a good idea, because the insurance product they’re peddling might not suit your needs. It also flies in the face of TCF.

Will they treat you fairly?

TCF – or Treating Customers Fairly – is an outcomes-based regulatory approach that’s designed to ensure that regulated financial institutions deliver specific, clearly set-out fairness outcomes for their financial customers.

‘In terms of Treating Customers Fairly, customers are required be treated fairly throughout the financial product’s cycle,’ says Christine Rodrigues, a partner at law firm Bowmans. ‘Customers need to understand the terms and conditions of their insurance policy, and if they do not understand, they should be asking questions to help them understand what they are and are not covered for, as well as any other terms and conditions of the policy.’

Are they regulated?

So if your credit provider starts leaning on you to take out their insurance policy, you may need to push back. ‘No person should be pressurising a consumer to purchase any financial product, even if it is a requirement of obtaining a loan,’ Rodrigues says. ‘Customers, in terms of law, have the right of free choice to choose with whom they wish to insure, as well as the right of substituting an insurance policy if later on they decide that they would like to seek an alternative to the option that they have procured via the credit provider.’

Credit life policies in South Africa are regularised in terms of the amount of premiums that may be charged and the minimum cover that must be provided. But while life insurers are regulated by the Financial Sector Conduct Authority (FSCA), credit life insurance providers aren’t.

‘If a person acts as an insurer, they are required to be licensed in terms of the Insurance Act of 2017,’ Rodrigues warns. ‘Otherwise they are conducting business in contravention of the law. Every person who is licensed as an insurer has their details published on both the FSCA website and the Prudential Standard, which forms part of the South African Reserve Bank. If consumers are unsure whether their policy has been insured with a licensed insurer, they can check on the FSCA website.’

The chances are that your credit provider will have an attractive life insurance policy that meets your requirements. The chances are also that they’re regulated by the FCSA, and that they will – as they must, by law – treat you fairly.

But it’s always worth checking.