Nicolette’s Nickels:

Last week I received an email from a distraught young lady. Two weeks after her mom’s passing, the bank was coming for their family home. Her mom had taken out a student loan to get her children educated and passed away before the loans were settled. In the absence of a life insurance policy that could adequately cover any debt in her estate, the bank was looking to sell her assets and, you guessed it, the house had to go.

This is an unfortunate situation that some of us sometimes face due to loss of work, an accident that leaves us disabled, or a retrenchment that catches us unexpectedly. Other than having that mighty emergency savings account we spoke about last time, you may be wondering how else you can protect yourself. It takes one late payment to get you into a spiral of defaults, cars being repossessed, and assets having to be liquidated. Well, the simple answer is credit life insurance.

You need to cover all your aces. You may be opening all sorts of store accounts and getting loans for homes and cars. You may be very responsible by managing your finances and paying off your debts on time every month. But have you ever thought about what would happen to your debt should you fall ill, become disabled, unemployed, or pass on?

In most cases, your debt will not die with you; nor does it disappear if you ignore it. If you have assets in your estate, they may be used to settle the debt, or if you have a spouse or co-signed for credit with another person, they may be responsible for making those repayments.

You probably did not think about that when you signed the credit agreement documents.

Credit life insurance is designed to cover the cost of your debt when you are no longer able to make the repayments in your own capacity. You make monthly payments for this cover, just as you would for any other type of insurance, and should you fall into a pit, it will be your safety net to settle any debt you still owe.

The National Credit Act states that a credit life policy may cost you a maximum of R4.50 a month for every R1 000 owed to the credit provider. This applies to all credit excluding home loans, which is R2 for every R1 000.

Seems simple enough, right? However, beware of the little tricks that come into play. Remember that, according to the National Credit Act, you may claim from credit life insurance for disability and unemployment, not only death. If you have ever applied for UIF, you need to check with the insurance provider whether that will affect your cover or not, as some institutions may reject your claim if that is the case. The National Credit Act also states that a credit provider may insist that you have credit life insurance on your credit agreement with them; however, you are not forced to use their product - you can shop around for a better deal.

A man once signed for credit life insurance when he took a car on finance without knowing how much he was actually paying. The dealership overpriced the vehicle as they wanted to increase their commission from the insurance.

Make sure that you are not being cheated. Read through the credit agreement thoroughly for anything on credit life insurance, and if you are uncertain, ask a professional to go through the document with you. On home loans, you have several options in terms of insuring the outstanding bond amount. You may cede a portion of your life insurance policy (some banks prefer this and make it a condition of the loan), or you may take out what is referred to as bond insurance.

Remember that credit life insurance is only for your debt should you not make those repayments yourself. Do not pay more than you need to, because the money will not be used for anything else. Shop around for the insurance policies that will work best for you. You may even find that your regular life insurance may be enough to cover your unpaid debt in the event of your untimely death.

Like any other insurance policy, credit life insurance will not pay out when you claim if you have not kept up with your premiums.

One more thing to consider is that if you are retrenched or take voluntary retrenchment, you can claim on your credit life insurance. The inclination for many people is to withdraw money from their pension fund or use severance-package money to settle the debt. Claiming from credit life insurance is an available option. But not all credit life insurance policies are made equal, so make sure you read the insurer’s Ts and Cs.

While your children are not obliged to pay your debts if anything happens to you, they may still be left burdened, as your creditors can come after assets in your estate - and you would not want your family to be left without a home to live in. So if you wish to protect your loved ones, consider credit life insurance today.

Nicolette Mashile is the co-host of the SABC1 talk show Daily Thetha, an actress on Generations and the founder of Financial Bunny, a financial literacy platform. She has recently written a book, What’s Your Move? A collection of ordinary financial lessons.

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