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Credit Life Insurance

Learn the key points of this type of life insurance, and how it works.

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What is credit life insurance?

Credit life insurance can cover loan repayments if you die before fully repaying your loan (or loans). It’s taken out to help pay off your outstanding debts when you pass away, with the value of the policy going directly to your creditors.

How does it work?

This form of life insurance is typically offered when you take out a loan, such as a home loan, car loan or a line of credit. Unlike many other types of life insurance, the value of credit life insurance doesn’t go to your beneficiaries, but to your creditors. The value of the policy dwindles over time as the outstanding balance on your loan decreases.

Before considering credit life insurance, ask yourself: do I already have disability insurance or a life insurance policy? If you do, the chances are good that your insurance policy covers loan repayments after an injury or death.

Pros

  • It takes care of your outstanding debts when you die.

Cons

  • Your beneficiaries won’t get the proceeds from your policy.

Is credit life insurance right for me?

Credit life insurance is marketed as a method of protecting your heirs from inheriting your debt, but the policy payout from a term of whole life policy (see below) is capable of providing the same coverage. While the premiums stay the same, coverage decreases over time, so consider alternative policy options before you apply.

What are some of the other types of life insurance to consider?

When comparing your life insurance options, you may want to consider:

  • Whole-of-life cover. This cover offers protection for your entire life. This means your insurance provider will pay-out in the event of your death – whenever it occurs. This type of life insurance will have much higher premiums than term insurance, because it means that the insurance provider is increasingly more likely, if not definitely, going to have to pay out in the event of your death.
  • Term insurance. This type of insurance lasts for a fixed period or term. If you pass away within the policy term, then your insurance company will pay a lump sum to your dependants. However, if you don’t pass away during the policy, then it lapses and you will no longer be covered, nor will you receive any form of payment.
  • Income protection insurance. This type of cover acts as a financial safety net if you’re unable to work due to a sudden illness, injury or death. It pays your family a percentage of your wage, for a set period. Read our guide for more about how income protection works.

Life insurance – key terms explained

These are some of the terms you might come across when you’re researching life insurance policies:

  • Beneficiary. The person, people or organizations that will receive the proceeds from your policy when you die.
  • Cash value. A tax-deferred savings account that earns interest over time according to a rate set by your insurer. It’s a key part of all permanent policies.
  • Death benefit. The amount of money paid out to your beneficiaries when you die.
  • Face value. Also called the coverage amount, this is the value of your policy. It’s directly linked to the death benefit. If you purchase a policy worth R2,000,000, then your beneficiaries should receive R2,000,000 when you die.
  • Premium. The fee you pay to keep your policy in force.
  • Term. The period of time your policy is active — like 10, 20 or 30 years.

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