What is Credit Insurance?
Credit insurance is also known as payment protection insurance or credit protection insurance. It is, very simply, an insurance option you can take out with your credit product to protect your repayments in case you die, become ill or disabled or lose your job. This insurance should mean that if for some reason you cannot meet your loan repayments, the credit insurance will provide a safety net so that you will not have to default. This can be a good thing, but only if you knowingly take out the credit insurance with full understanding of the costs involved and of the fine print. A consumer should always understand the terms and conditions of any financial product they take out – especially with insurance products. If you understand the product from the beginning, you can avoid feeling as if you've been ripped off at a later stage. Particular points to note about credit insurance: Whether or not it is part of your credit product. There has been controversy both in South Africa and abroad about financial institutions adding credit insurance into a product without properly informing the consumer. In 2008 a study in Britain found that around 40% of credit insurance policy holders were unaware that they were paying for this product. In 2012 Moneyweb exposed South African furniture retailers for adding extra costs including credit insurance to credit taken by low-income customers. These additional costs had consumers paying up to R27 000 for goods that cost around R9 000. The National Credit Act stipulates that the consumer must be fully informed of all the added costs associated with their credit and charges must be reasonable. Know the terms of the claim. Credit insurance is controversial in part because of the high rejection rate of credit insurance claims. moneysmart tip: Before you take out a credit insurance product be sure you understand in full what's required for a claim to be successful. If it is too narrow than skip the credit insurance and look for a better alternative. It's also critical that you know how much of the loan the insurance actually covers if your claim is successful. First stake out the alternatives. Credit insurance can be quite pricey with limited payout options. If you want to protect your credit in case of death, disease or illness, it could work out cheaper to get a life insurance policy instead. moneysmart tip: Investigate various options before you decide on taking out credit insurance. Do not make the mistake of simply agreeing to in-store credit insurance just because it's the most convenient. Be sure you have compared the various monthly premiums on credit insurance and life insurance options. Credit insurance can be a good thing, but it is also used by financial institutions to make large profits off of unsuspecting consumers. South Africa does have laws in place to protect the consumer from such unscrupulous credit practices, but as the example of the furniture retailers shows, these laws are not always complied with. Protect your future self by ensuring that you understand all the fine print of any financial product before you sign on the dotted line.