John Vaughan (Financial Advisor) @ Lucid Living
1. No bank is entitled in any way to force you into an expensive credit life assurance product, even by inferring that the loan will not be available if you do not buy its product.
Banks are allowed to make credit life assurance a condition of granting a loan, but they may not prescribe which credit life assurance you may use.
However, the banks may dictate the type of policy that may be ceded. For example, the banks may, and mostly do, insist that your credit life assurance policy contains cover in case you are retrenched.
You are entitled to, and should shop around for, the cheapest option. Individually risk-rated credit life assurance may be cheaper, even if you suffer from health problems or are elderly, because the premiums for bank-sold credit life assurance linked to unsecured short-term personal loans are excessively expensive.
2. You may cede an existing life assurance policy to cover the loan should you die or become disabled and are unable to work before the loan is repaid, but there will probably also be a requirement that it has a retrenchment benefit.
3. If you use bank-provided credit life assurance linked to an unsecured short-term loan, always pay the premium separately. Do not allow or accept an option where the premium is added to the loan amount, because, if you do, you will pay interest on the premium.
What the Bank’s Credit Life Insurance will cost you
The total premium for credit life assurance from Nedbank to cover a loan of R100 000 over two years is R10 558 (R439.95 a month), which equates to 10.6 percent of the value of the loan.
The premium for the individually risk-rated credit life assurance product from First National Bank (FNB) for a man aged 40 for cover of R1 million is R193 a month, with the premium guaranteed for five years.
So the FNB individual life policy costs you R1 a month for every R5 181 of cover, whereas the Nedbank credit life assurance attached to its personal loans costs R1 a month for every R24 of cover.
In other words, 10 times the amount of cover on the FNB policy costs a fraction of the Nedbank credit life assurance cover for R100 000. But roughly the same comparison can be made with the credit life assurance sold by FNB to borrowers with unsecured personal loans.
The situation is worsened by the fact that credit life assurance sold by the banks pays out benefits equal to the reducing outstanding loan amount. This pushes the difference between the cost of the premiums on an individual policy and those on the credit life assurance polices to excessive levels.
The benefits of the FNB product are level for the full period of the assurance, so if you die 18 months into the 24-month loan, your beneficiaries will still receive the full R1 million.