Covid Advisory: Credit insurance and debt relief

30 April 2020 133
Did you know that if credit insurance has been taken out on your debt, you may be eligible for coverage on your payment obligations?

In the wake of the COVID-19 pandemic, the nationwide lockdown and the devastating effect of these on the economy, many businesses have had to make the difficult decision to place their employees on unpaid leave, introduce salary cuts and in some cases even retrench staff. This of course in turn has placed significant financial pressure on these individuals, who have suffered a loss of income, but still have to satisfy the repayment of their debt obligations and cover their expenses.

While many individuals have jumped at the option of taking payment holidays on the payment of their debts, where these have been made available by credit providers, there may actually be an alternative option with less potentially burdensome consequences over the long term.

Credit insurance (being an insurance policy taken out on debt repayments) may be, or may have unknowingly been, taken out or automatically included on many debt products, including home loans, vehicle finance, overdraft facilities and credit cards.

Since 1 August 2017, credit insurance may cover repayment obligations, for a period of up to 12 months, if a person becomes unemployed or is unable to earn an income. This option may be available even in circumstances where you lose only a portion of your income. Certain credit providers have extended this credit insurance cover to debt products taken out even before this date.

Therefore, credit insurance may be used to assist with the payment of instalments, either for a period of 12 months, or for the remaining period of the loan, or until such time as the individual can earn an income again, whichever of these happens first. Where a fixed portion of income is lost, the credit insurance will only cover that portion of the repayment obligation. Some credit providers have also extended this cover to contract workers and for loss of commission based income.

It is important for each person to carefully consider their specific debt obligations, in order to determine whether these have credit insurance and what the terms and conditions are. Many debt products require that credit insurance be taken out, which is already included in the repayment premiums, but this may not always be the case, or apply to every debt product.

It should be kept in mind that credit insurance will generally not cover the debt obligations of persons who are self employed, unless they have confirmed that they were at the time when the cover was taken out, employees of the business (for example, even directors of a company may be considered employees under certain circumstances) and have paid the appropriate premiums to date.

While payment holidays on debt obligations have provided some breathing room for persons who have experienced a loss of income as a result of the COVID-19 pandemic and the nationwide lockdown, this may not always be the preferable option. Debt holidays allow persons to skip on making payments on their monthly premiums for a few months. While this might help over the short term, it should be kept in mind that the deferred payments will have to be made up later and interest continues to accumulate for that period on the total outstanding amount, which will lead to increased monthly premiums or an extended loan repayment period later. Credit insurance on the other hand, if available, may provide the same breathing room to persons who have suffered a loss of income during this time, but without the same potential of increases in their premiums or extensions of their repayment terms. Each person should carefully consider their own circumstances in order to determine what may be feasible and what is the best option for them.

While this information regarding credit insurance may not directly provide your business with an option for debt relief, this may be valuable information to pass on to your employees, if you may be planning or have implemented retrenchments, unpaid leave or salary cuts, who may potentially use their credit insurance to alleviate their financial burdens during this time and the months ahead.

For the moment and at the time of publication, this is the information we have obtained. We will keep you updated should any further relevant information come to our attention.

Although we have used our best efforts to ensure that all information contained in this communication is accurate as at the date hereof, we cannot guarantee the accuracy thereof and recommend verification thereof before use.