Bank-linked life as­sur­ance can ramp up cost of your per­sonal loan

Banks can make tak­ing out life as­sur­ance a con­di­tion of grant­ing an un­se­cured per­sonal loan, but the poli­cies sold by the banks are of­ten not in your fi­nan­cial in­ter­est. Bruce Cameron re­ports This is what it can cost you

Weekend Argus (Saturday Edition) - - MEDIA& MARKETING -

Be­ware the add-ons if you take out an un­se­cured short-term per­sonal loan from a bank: ex­or­bi­tant in­ter­est rates – in the re­gion of 30 per­cent – ad­min­is­tra­tion charges and life as­sur­ance pre­mi­ums could see your pay­ing back an additional 60 per­cent-plus on the loan.

The life as­sur­ance – which cov­ers the loan in the event of death, dis­abil­ity or re­trench­ment – into which the banks will steer you is about the most ex­pen­sive on of­fer.

The premium on the life as­sur­ance may also be added to your loan amount, with the re­sult that you will be charged fur­ther in­ter­est.

Or­di­nary life as­sur­ance, on av­er­age, costs less than a quar­ter of the life as­sur­ance sold by the banks to cover un­se­cured per­sonal loans.

The life as­sur­ance sold by the banks to cover un­se­cured per­sonal loans is pro­vided by life com­pa­nies that are owned ei­ther by the banks or by com­pa­nies as­so­ci­ated with the banks.

The Fi­nan­cial Ser­vices Board (FSB), the National Trea­sury and the National Credit Reg­u­la­tor are about to launch an in­ves­ti­ga­tion into credit life as­sur­ance in gen­eral, and the in­ves­ti­ga­tion will in­clude the banks’ as­sur­ance prod­ucts.


Jonathan Dixon, the FSB’S deputy ex­ec­u­tive in charge of in­sur­ance, says the FSB is con­cerned about the terms and con­di­tions un­der which the banks force bor­row­ers to take out high-cost short-term in­sur­ance.

The banks use tac­tics such as in­sist­ing that the life as­sur­ance in­cludes the pay­ment of a ben­e­fit to cover the re­pay­ments in case of re­trench­ment, Dixon says.

Nedbank, for ex­am­ple, ar­gues that al­most half the ben­e­fits in value paid on the credit life as­sur­ance is for re­trench­ment and that such cover is there­fore es­sen­tial.

How­ever, the chances of claim­ing for life and dis­abil­ity are far lower for credit life as­sur­ance, be­cause most bor­row­ers are younger and not in the high death claim bracket, and this in­creases the po­ten­tial prof­its for banks or as­so­ci­ated com­pa­nies.

The FSB’S in­ves­ti­ga­tion into the credit life as­sur­ance in­dus­try will in­clude a sur­vey that raises ques­tions about as­sur­ance prod­ucts linked to bank prod­ucts, Dixon says.

The banks ap­pear to be do­ing every­thing pos­si­ble to pre­vent bor­row­ers from tak­ing out cheaper life as­sur­ance op­tions – for ex­am­ple:

Nedbank fi­nan­cial ad­vis­ers The to­tal nom­i­nal premium for life as­sur­ance from Nedbank to cover a loan of R100 000 over two years is R10 558 (R439.95 a month), which equates to 10.6 per­cent of the value of the loan.

The premium for the in­di­vid­u­ally risk-rated life as­sur­ance prod­uct from First National Bank (FNB) for a man aged 40 for cover of R1 mil­lion is R193 a month, with the premium guar­an­teed for five years.

So the FNB in­di­vid­ual life pol­icy costs you R1 a month for ev­ery R5 181 of cover, whereas the Nedbank credit life as­sur­ance at­tached to its per­sonal loans costs R1 a month for ev­ery R24 of cover.

In other words, 10 times the amount of cover on the FNB pol­icy costs a frac­tion of the Nedbank credit life cover for R100 000. But roughly the same com­par­i­son can be made with the credit life as­sur­ance sold by FNB to bor­row­ers with un­se­cured per­sonal loans.

The sit­u­a­tion is wors­ened by the fact that credit life as­sur­ance sold by the banks pays out ben­e­fits equal to the re­duc­ing out­stand­ing loan amount. This pushes the dif­fer­ence be­tween the cost of the pre­mi­ums on have told Per­sonal Fi­nance that they have been threat­ened with dis­ci­plinary ac­tion if they try to sell more af­ford­able life as­sur­ance to peo­ple who take out a per­sonal loan.

In re­sponse, Nedbank says its fi­nan­cial ad­vis­ers are not in­volved in the per­sonal loan arena and claims it “would not threaten dis­ci­plinary ac­tion to a fi­nan­cial plan­ner ( ad­viser) who gives ap­pro­pri­ate fi­nan­cial ad­vice”.

First National Bank ( FNB) re­cently launched a life as­sur­ance prod­uct that, it claims, is cheaper than any other sim­i­lar prod­uct (see “FNB prod­uct can cut pre­mi­ums by up to 50 per­cent”, be­low).

But the FNB prod­uct comes with two con­di­tions:

It is avail­able only to se­lect FNB clients; and

It is not au­to­mat­i­cally avail­able to FNB clients who have un­se­cured short-term per­sonal loans. an in­di­vid­ual pol­icy and those on the credit life po­lices to ex­ces­sive lev­els.

The ben­e­fits of the FNB prod­uct are level for the full pe­riod of the as­sur­ance, so if you die 18 months into the 24-month loan, your ben­e­fi­cia­ries will still re­ceive the full R1 mil­lion.

Banks are mak­ing it dif­fi­cult for bor­row­ers to cede ex­ist­ing life as­sur­ance poli­cies or new poli­cies by in­sist­ing that the poli­cies have a a re­trench­ment ben­e­fit. Very few in­di­vid­u­ally un­der­writ­ten poli­cies have re­trench­ment ben­e­fits.

The banks have added to the dif­fi­culty by not sell­ing stand-alone re­trench­ment as­sur­ance.

The nom­i­nal pre­mi­ums on the poli­cies sold in tan­dem with per­sonal loans ex­ceed 10 per­cent of the loan amount, and the pre­mi­ums are con­sid­er­ably higher than those on nor­mal un­der­writ­ten life as­sur­ance.

Banks, in their doc­u­men­ta­tion, in­form clients that they can ob­tain life as­sur­ance else­where, but, on the ba­sis of com­plaints re­ceived by Per­sonal Fi­nance, this is of­ten not pointed out ver­bally. The in­sin­u­a­tion of­ten is that in or­der to qual­ify for the loan, clients have to buy the “bank’s” credit life as­sur­ance.

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