First and foremost, credit life insurance doesn’t classify as one of the major forms of life insurance in the sea of coverage offered today. However it shouldn’t be overlooked, as it is actually a viable avenue to take when dealing with the subject of debt. Its purpose is basically to take care of any outstanding debt that the policy holder may leave behind.

It is essentially an insurance product that specifically addresses instalment-type debt, as designed by banks, lenders and retailers in conjunction with long-term insurers.

How Does It Work?

• When you die, the policy will immediately pay out the outstanding capital on a short or long term debt – such as on a car or home – to your loan provider.
• It is valid for the whole loan contract period or if you start the life policy after you took your loan, for the outstanding period, or otherwise until a disablement, death or dread disease claim is paid out.
• The pay-out amount decreases in correlation to the repayment you make on your loan, which makes it a decreasing sum assured product.
• Should you become retrenched, it can pay out up to R20 000 per month for as long as 6 months – which will cover your long or short term loan installments.
• It includes the perks of dread disease cover and occupation-based disablement cover.

Decreasing Term Insurance?

Many professionals view credit life insurance as decreasing term insurance with a different name, which is reasonable seeing as your debt reduces along with your premium. Never the less, the Insurance Institute of South Africa has classified the two as entirely separate from one another. There are two reasons for the distinct classification:

• With credit life insurance you don’t need to provide evidence of health, while you do have to in the case of term insurance.
• With term insurance, the policy has to be ceded to the lender, but with credit life the cession is usually part-and-parcel of the policy structure.

Read the Fine Print

Before you overlook the concept of credit life insurance, you should check if the lender in your loan agreement requires you to have credit life cover. Either way, obtaining a credit life plan is a good way to protect your dependents and to ensure that your debt is resolved after you die. The last thing anyone wants is for their family to worry about tying up financial loose ends.

Key Features

• Amount of Coverage

Traditional insurance policies generally have a fixed coverage amount, whereas credit life provides what is known as “truncated” coverage which has been explained above. Basically, both the coverage amount as well as the balance on the loan decline in direct correlation with one another. The downside of this is that while your coverage shrinks every month, your monthly payment remains the same.

• Beneficiaries

In the case of a term life policy, you simply designate a beneficiary who will receive payment from the policy upon your death. Credit life works differently in that the sole beneficiary on the policy is the lender. Thus when you die, the insurance company pays off the outstanding balance on your loan, and no proceeds go to the executor of your estate.

The Verdict

Considering what credit life insurance costs and what it provides, the option of term life will generally offer a better policy with greater coverage. However, if you purchase enough coverage under a credit life plan, your loan balance could be paid with enough proceeds remaining for your beneficiary. It depends on your financial standing and individual needs.