Covid-19 has hurt the global economy, and a key concern on South Africans’ minds relates to finances, their debt, and how to manage these in a time of uncertainty. Whether it’s an entire country or a business or an individual, “payment holidays” are one of the most frequently mentioned concepts – the idea being that creditors will allow the borrower to skip a few months of scheduled payments for the duration of this global pandemic.
Payment holidays are a crucial pressure-release tool. Without them, the global economy could well experience too many sudden defaults that could cripple a fundamentally inter-locked economic system. Consumers need to understand that taking this option will only extend your debt burden further as lenders typically continue to charge interest during the payment holiday and capitalise it. With that in mind, we shouldn’t lose sight of other pressure-releasing tools already at our disposal, such as Credit Life Insurance (CLI).
CLI covers your debt in case you are retrenched, become disabled or pass on. This type of life insurance is sometimes – but not always – legally required for the duration of the credit agreement when you borrow money or use certain credit facilities. CLI policies are generally offered by the same institution extending the loan in the first place, which in practice often “hides” the CLI policy premiums by bundling them with the loan repayment instalments, into one debit order. CLI is the least understood form of insurance in South Africa; this is evidenced by a claims rate that is usually around 10%, which compares poorly with the more than 40% claims rate we see with funeral insurance policies which only covers one event. We need to arm ourselves with the knowledge of our rights and responsibilities on this type of insurance to make it work better for ourselves.
In a negative economic climate like what we’re currently experiencing, CLI offers vital protection against retrenchment or possible loss of income. Crucially, it fulfils the policy holder’s loan commitments rather than deferring them to a later date. Which means every South African with this cover in place currently suffering loss of income due to Covid-19, should get a hold of their policy documents, understand the terms and conditions, and claim for CLI if provision has been made for it in your documents, long before asking for a payment holiday.
The longer this crisis continues, the more we will all face income-earning pressures. To illustrate this: Yalu’s average retrenchment claims query volume before the lockdown was roughly 0.6% per month (off an in-force customer base in excess of 10 000 credit agreements). Post lockdown, this rate shot up to 4.5%. Clearly, retrenchment is a massive issue for South Africans right now.
The South African economy would benefit from vastly improved CLI awareness, and it’s a responsibility we take head-on at Yalu. But the insurance sector should also use our current experience of the Covid-19 pandemic to cater better to future national emergencies. There are, in other words, gaps in the composition of CLI policies that, if addressed in the years ahead, could provide even better cover, and effectively reduce the country’s need to rely on a measure of absolute last resort, like payment holidays.
Based on the retrenchment queries we’re currently receiving at Yalu, there are two key areas CLI providers would do well to focus on in the future: forced compulsory leave and self-employment. In the case of the retrenchment of a permanently employed citizen, CLI policies are straightforward, and effective. But in our current crisis a lot of people aren’t facing retrenchment but rather, they are being put on compulsory unpaid leave, or are having a portion of their income reduced by their employer. The hard reality is that it’s rare for CLI providers to cover these unique instances that fall outside a retrenchment outlined in the Labour Relations Act.
And then there’s self-employment. CLI policies generally have a bias towards covering people in traditional, full-time employment. But the reality of our world in 2020 is that a huge number of economically active people are self-employed – either running their own businesses as sole proprietors or participating in the gig economy. Such people don’t fit within the CLI paradigm, which puts a further strain upon them and our economy. If this protection was in place as a standard feature across the insurance industry, the dramatic impact of a national lockdown could have been further mitigated.
But that’s all for the future.
Right now, the country needs to do two things:
1) Make sure that every South African is aware that CLI exists, and could be applicable to them;
2) Make it as easy as possible for consumers to check whether they have CLI policies in place for any of their loans.
The financial sector has a huge role to play. Bold, easy to understand CLI communication, backed by multiple channels such as online portals and call centres ready to give consumers the information they need (as to whether they have cover or not, or as to whether they qualify to claim and with respect as to how to go about claiming) could have a very positive economic impact. This would delay the need for emergency steps such as payment holidays.
Nkazi Sokhulu is the CEO of Yalu, Old Mutual Limited group.