What is Credit Cover?
Credit cover is a short-term category insurance that covers your credit or debt in case of certain eventualities. Credit Cover is also known as Credit Linked Insurance, Credit Life Insurance or Credit Protection. Regardless of what the name is, the structure and purpose remain the same.
When a consumer applies for credit the credit provider usually imbeds a credit linked insurance premium into the monthly loan installment. The credit linked insurance premium will then be paid monthly with the loan installment.
A Consumer has the right to take out his/her own policy. A Consumer is not obliged to take the credit linked insurance offered by the credit provider.
Benefits of a credit cover policy typically consist of a retrenchment benefit, death, disability and critical illness.
Retrenchment benefits will pay out an amount equal to your monthly installment. This amount wil only be paid on the debt that is covered in case you get retrenched. The number of payments or period of retrenchment payouts on a policy might differ from insurer to insurer. It will range anything from 3 months up to 12 months cover when you get retrenched.
The most obvious benefit on all credit cover policies is the death benefit which will settle the debt that is covered in case you die. The amount that is covered might also differ from insurer to insurer. It is important to make sure that there is sufficient cover for the amount of debt that is owed.
The abovementioned benefits are the two most likely to be added to a policy with disability and critical illness sometimes being optional when taking out a policy.
When considering the disability benefit there could be a split between permanent and temporary disability. A credit cover policy could be structured to pay a lumpsum in case you become permanently disabled and are unable to work. When lodging a claim for a temporary disability a policy will most likely pay out a monthly amount equal to the installment of the debt that is covered. The number of payments might range from 3 months up to 12 months. Payment might also stop when you are able to return to work and earn an income.
A policy with a critical illness benefit might pay out a claim in one of two ways. If the critical illness prohibits you from being able to work and earn an income the policy could pay a monthly amount that is equal to the installment of the debt that is covered. Some insurers who offer a credit cover product will settle the full amount of the debt that is covered.
Credit cover policy premiums are usually calculated as a rate per thousand Rands that are covered. The rate can range anything from R1.55 up to R4.50 which is the maximum rate prescribed by the National Credit Act. When applying for credit the credit provider will typically apply the maximum rate applicable to increase earnings on the loan. It is important to understand how much the linked premium will be before signing for a loan.
Have a look at your current debt repayments to find out if you are currently paying for a credit cover policy. Making the switch to a cheaper product with better benefits might save you thousands of Rands per month.
Having a credit cover policy in place is a good idea considering the risks related to the economic climate. Companies are retrenching frequently, and some are doing it at a scale that is frightening. Making sure that you are covered gives you peace of mind. Make sure that you are sorted should the unforeseen happen.