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16 Jan 2012

Credit Life Assurance Increases Cost Of Bank Loans

Insurance No Comments

Eva Smith (Attorney) @ Lucid Living

Beware the add-ons if you take out an unsecured short-term personal loan from a bank: exorbitant interest rates – in the region of 30 percent – administration charges and credit life assurance premiums could see your paying back an additional 60 percent-plus on the loan.

The credit life assurance – which covers the loan in the event of death, disability or retrenchment – into which the banks will steer you is about the most expensive on offer.

The premium on the credit life assurance may also be added to your loan amount, with the result that you will be charged further interest.

Ordinary life assurance, on average, costs less than a quarter of the credit life assurance sold by the banks to cover unsecured
personal loans.

The credit life assurance sold by the banks to cover unsecured personal loans is provided by life companies that are owned either by
the banks or by companies associated with the banks.

The Financial Services Board (FSB), the National Treasury and the National Credit Regulator are about to launch an investigation int credit life assurance in general, and the investigation will include the banks’ assurance products.

Jonathan Dixon, the FSB’s deputy executive in charge of insurance, says the FSB is concerned about the terms and conditions under which the banks force borrowers to take out high-cost short-term credit life assurance.

The chances of claiming for life and disability are far lower for credit life assurance, because most borrowers are younger and not in the high death claim bracket, and this increases the potential profits for banks or associated companies.

The FSB’s investigation into the credit life assurance industry will include a survey that raises questions about assurance products linked to bank products, Dixon says.

The banks appear to be doing everything possible to prevent borrowers from taking out cheaper credit life assurance options – for
example:

  • Nedbank financial advisers have told Personal Finance that they have been threatened with disciplinary action if they try to sell more affordable credit life assurance to people who take out a personal loan.
  • Banks are making it difficult for borrowers to cede existing credit life assurance policies or new policies by insisting that the policies have a a retrenchment benefit. Very few individually underwritten policies have retrenchment benefits.

The nominal premiums on the policies sold in tandem with personal loans exceed 10 percent of the loan amount, and the premiums are considerably higher than those on normal underwritten credit life assurance.

Banks, in their documentation, inform clients that they can obtain credit life assurance elsewhere, but, on the basis of complaints
received by the FSB, this is often not pointed out verbally. The insinuation often is that in order to qualify for the loan, clients have to buy the “bank’s” credit life assurance.

“As a result of these explotative tactics, Lucid Living has partnered with an insurer to offer our clients one of the “safest” and cheapest credit life assurance products on the market,” says Adv Kate Thambiran, MD of Lucid Living. “Lucid AccessLife allows you to consolidate several credit agreements under a single policy; decrease or increase your level of cover as and when credit facilities are paid off or new ones are taken up; and the single policy can be used as a replacement policy on your existing and new credit agreements,”  Thambiran points out.

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