Why credit life instead of life cover?

27 November 2012

When creditors grant a loan they might insert a condition that the loan must be covered by credit life insurance.

The question arises whether one cannot rather take out normal life cover instead of credit life cover.

There are fundamental differences between the two types of products, which make credit life the preferred option for lending institutions, as well as to the benefit of the consumer. In other instances life cover might be a better option. It always depends on your specific circumstances.

Below are some of the differences between the two policy categories

1. Premium. With life policies each client is rated individually. Factors like income, smoking status, age and profession assists in determining the rate at which insurance cover will be granted. Depending on health, benefits could be excluded or premiums loaded. With credit life the whole group is considered as one risk, and a premium is calculated and the same rate used for all members.

2. Underwriting. Life policy applicants have to complete a comprehensive underwriting questionnaire. The prospective policyholder can be asked to go for various medical tests, e.g. blood tests, medical examinations and ECG’s. Credit Life clients complete a short questionnaire, and is then immediately accepted or declined.

3. Benefits. Life policyholders have to apply for, be underwritten and pay for each individual benefit that they want. With credit life all the benefits are included as part of the package deal.

4. Beneficiary. With life insurance the beneficiary must be appointed by the policy owner. If none is appointed the proceeds will go to the estate. With credit life the proceeds are paid directly to the creditors. There is surety that the money will not be misspent, but used to eliminate the liability.

5. Time to acceptance. Because of the rating and underwriting process the issuing of a life policy can be a very drawn out and lengthy process. Credit life has an immediate decision.

Because of these differences lending institutions prefer to cover the risk on a loan with credit life.

The advantages to them are as follow.

1. The premium is easy to calculate. (Pre-determined rate multiplied by the cover amount)

2. No delays due to underwriting.

3. Package deal simplifies the process.

4. They are assured that they will receive the money, as they are the beneficiaries.

5. The cover can start immediately.

Coupled with a good rate (Insurance Busters rates are R3,50 and R5,00 per R1 000 sum insured for single and dual lives respectively vs. single life rates of R10 to R30 per R1 000 with some of our competitors ) these advantages are also to the benefit of the consumer as it allows the granting of credit to operate smoothly and speedily. Decisions can be made, and lending procedures initiated without being delayed by the life cover application process.

This comparison relates to a specific situation regarding to the applications for credit from lending institutions. Life cover, and all the differing ancillary benefits clearly have a place in financial planning. You should use an accredited advisor to assist you to see which combination of plans and benefits would suite your needs and financial goals. At Insurance Busters all our representatives are trained to give you a professional and objective service to assist you with this.

Please contact Credit Life manager, André Goethals, (AndreG@insurancebusters.co.za) if you would like more information about this product or our services, and the benefits to you.

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