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
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.