Very often consumers take out Credit Life Insurance without actually knowing
what it is.
Simply stated, “Credit Life Insurance” is a life insurance policy taken out by a
borrower in order to pay off a borrower’s debt if that borrower dies, is disabled or
retrenched.
In a typical policy, the borrower will pay a premium which is often rolled into
their monthly loan payment and which allows the lender to be paid in the event the
borrower dies, is disabled or retrenched before the loan is paid off.
Although those are the instances usually covered, very often borrowers do not
understand this. In fact, often consumers are led to believe that it is insurance to
cover them when they are unable to pay back their debts irrespective of the reason
for the inability to pay. In fact, very often they think if they find themselves in
financial difficulties they can stop the monthly installments and the insurer will as
a result pay out.
What has, however, caused this kind of confusion is another type of insurance
typically taken out by the lender. This kind of insurance is called “Credit Guarantee
Insurance”. With this type of insurance, the lender takes out insurance to cover him
or herself in case the borrower fails to pay off the loan in circumstances other than
death, disability or retrenchment. However lenders often make the borrower pay
for such insurance. That practice is incorrect.
What do borrowers need to know?
Before signing any loan papers, ask the lender whether the loan includes any
charges for Credit Life Insurance. If it includes such insurance, ensure that you
fully understand what is covered. If you do not want Credit Life Insurance, tell
the lender. If the lender still pressurizes you to buy insurance, find another lender.
Review your loan papers carefully to be sure they have been drawn up correctly. A
lender cannot deny you credit if you do not buy Credit Life Insurance or if you do
not buy it directly from them. If a lender tells you that you will only get the loan if
you buy the Credit Life Insurance, report the lender to NAMFISA.
While the price of a policy will depend on the loan amount, Credit Life Insurance
policies can cost more than traditional life insurance. It is generally a little more
with Credit Life Insurance because there is a greater risk associated with the
product and that makes for higher premiums.
That higher risk comes into play because Credit Life Insurance is what is known as
a guaranteed issue product, meaning that eligibility is based solely on your status
as a borrower. Unlike most life insurance policies, the applicant will not be asked
to take a medical exam or disclose health details because what is being insured is
the balance of the loan, not the life of the borrower. Furthermore the lender is the
beneficiary, not you or your family.
Therefore only buy Credit Life Insurance if you are not insurable, meaning you are
not able to buy life insurance through regular channels.
Issued by:
Phillip N. Shiimi
REGISTRAR: LONG AND SHORT-TERM INSURANCE
