What is Credit Insurance, and How does it Work?

What is Credit Insurance, and How does it Work?

What is credit insurance?

Credit insurance is a form of insurance issued by long-term lenders that is usually offered with a new loan. Credit insurance typically covers 3 life events: death, disability, or unemployment. If one of these events takes place, the loan agreement is either settled in full of the monthly repayment is paid for a period.  

Credit insurance typically applies to long-term loans, such as a personal loan or a bond, or revolving credit such as on a credit card. Credit insurance doesn’t usually apply to short-term loans.

Which loan(s) does credit insurance affect?

Credit insurance typically only applies to longer-term loans, and is either automatically included in the monthly repayments, or can be purchased separately at an additional cost at the time the loan is taken out.

How do I know if I have credit insurance?

If you have a home loan, vehicle finance or a credit card with a bank, credit insurance may already be included in the total monthly repayment that you make each month. It’s important that before taking any other steps you first review what you might already be covered for.

If your existing loan provider doesn’t offer credit insurance as part of the included costs of your monthly repayment, you might find that you have existing cover with another insurer. Querying this with your bank or insurance provider can help you determine if and under which conditions you are covered.

Under which conditions does credit insurance apply?

Though credit insurance policies can differ from lender to lender, there are typically three types of insurance, namely:

  • Credit life insurance: Where a borrower’s loan will be paid off in the event of their death.
  • Credit disability insurance: Where a borrower’s loan will be paid off in the event they become disabled and unable to work in their previous capacity.
  • Credit unemployment insurance: Where a borrower’s loan is paid off if they become involuntarily unemployed, typically as a result of retrenchment.

When would credit insurance not apply?

Though credit insurance generally covers borrowers in the event of death, disability or unemployment, there are several conditions in which the policy may not apply. These can include:

  • Lawful dismissal: Where you have been dismissed from your place of work.
  • Voluntary forfeiture of employment income: Where you have declined your typical salary or wages.
  • Voluntary retrenchment: Where you have agreed to a retrenchment process.
  • Resignation: Where you have voluntarily left your place of work.
  • Retirement: When you have voluntarily stopped working.
  • Participation in an unprotected strike: Where you have participated in strike action illegally, and have not received your regular income.

Where can I check my credit insurance policies?

There are several credit insurance providers in South Africa – ranging from banks to independent insurance providers. Borrowers with credit products such as home loans, vehicle finance, or credit cards can review their credit insurance policies here:

How much does credit insurance cost?

Since 2017, new regulations have stipulated that the maximum monthly cost of credit insurance is R4.50 for each R1,000 owed on all credit agreements except mortgages, while ordinary mortgage agreements have a R2 limit for each R1,000 owed.

Importantly, the regulations also clarify that, from August 2017, consumers have a right to substitute their credit life policy if another policy offers a more favourable rate for the same benefits and protection.

What should I watch out for when taking out credit insurance?

As the Office of the Credit Ombud advises, many customers who purchase credit insurance are not actually aware of their coverage. However, for customers wishing to take out a credit insurance policy, it is worthwhile to:

  • Avoid purchasing any insurance product that you do not fully understand.
  • Shop around for the most favourable and affordable credit insurance policy.
  • Ask for a copy of the policy document or schedule, which sets out the benefits offered by your policy before signing.
  • Read the fine print of any loan agreement to determine what your credit insurance policy covers.
  • Confirm whether your credit insurance policy is active if your account is in default.
  • Ensure that your family are aware of your accounts as well as the credit insurance that you pay, so that in the event of your death they can claim.

Does Wonga offer credit insurance?

At Wonga, we offer loans of up to 3 months for new customers, and 6 months for existing customers. As these loans are short-term and are designed to help you manage your cash flow or achieve your next step, we don’t offer credit insurance with any of our credit products.

However, if you have credit insurance with a third party, you may already be covered in the event of death, disability or unemployment. It’s vital to review your own insurance policy and to understand what you are covered for.

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