COVID-19 – “Payment Holidays” and Credit Life Insurance in South Africa

As per the announcement by the President of South Africa on Monday, 23 March 2020, as well as the subsequent regulations published by Government, South Africa currently finds itself in the midst of a 21-day lockdown in an attempt to curb the spread of the Coronavirus.

The lockdown leads to closure of non-essential businesses, which will surely have extreme ramifications for employees of such businesses.  In many cases, these employees will not receive an income for as long as the lockdown continues and may even lose their jobs permanently.

The question now arises:  How will the affected employees be able to meet their obligations in terms of repayment of loans such as home loans, motor vehicle finance, etc.?

Following the announcement of the lockdown, several of South Africa’s major banks proceeded to announce “payment holidays” for up to three months.  As a result, customers will be able to defer the repayments of their loans for the period of the “payment holiday” granted by their banks.  Customers should, however, realise that the “payment holiday” may still come at an expense to them in the long run, as in most cases the interest payable on these loans for the period of the “payment holiday” will merely be capitalized and will eventually have to be paid.  This relief can, therefore, be seen as short-term cashflow relief at best and is not a “freebie”.

Another option that affected customers can turn to is credit insurance, including credit life insurance.  The National Credit Act No. 34 of 2005 (‘the NCA”) defines these terms as follows in Section 1:

credit insurance” means an agreement between an insurer, on one hand, and a credit provider or a consumer or both, on the other hand, in terms of which the insurer agrees to pay a benefit upon the occurrence of a specified contingency, primarily for the purpose of satisfying all or part of the consumer’s liability to the credit provider under a credit agreement as at the time that the specified contingency occurs and includes:

(a) a credit life insurance agreement…”

credit life insurance” includes cover payable in the event of a consumer’s death, disability, terminal illness, unemployment, or other insurable risks that is likely to impair the consumer’s ability to earn an income or meet the obligations under a credit agreement.”

Credit insurance is regulated by Section 106 of the NCA.  Section 106(1)(a) provides that a credit provider may require a consumer to maintain credit life insurance during the term of their credit agreement, which insurance may not exceed at any time during the life of the credit agreement, the total of the consumer’s outstanding obligations to the credit provider in terms of their agreement.  Section 106(2) provides that a credit provider may however not offer or demand that the consumer purchase or maintain insurance that is unreasonable or at an unreasonable cost to the consumer.

In August 2017, the final Credit Life Insurance Regulations (“the Regulations”) came into effect, which made it compulsory for credit providers to offer a credit life insurance policy with their credit agreements with consumers.  They also limit the exclusions which may be included in a credit life policy.  These regulations are however not retrospective and are therefore only applicable to credit agreements concluded on or after 9 August 2017.

Regulation 3(1) provides a schedule of maximum prescribed cost of credit life insurance that may be charged by credit providers when offering these products to consumers and therefore prevents the exploitation of consumers by credit providers when offering these products.

Regulation 3(2)(c) states that the credit life insurance cover must provide for at least the settlement of-

“in the event of the consumer becoming unemployed or unable to earn an income, other than as a result of permanent or temporary disability, all the consumer’s obligations under the credit agreement that become due and payable

(i) for a period of 12 months;

(ii) during the remaining repayment period of the credit agreement; or

(iii) until the consumer finds employment or can earn an income,

whichever is the shorter period.”

Employees who lose their employment during the lockdown, or who are put on unpaid leave by their employers, can, therefore, find out from their bank or motor vehicle finance house whether they have an active credit life insurance policy in place, and request a copy of the policy document.  Credit statements can also be perused to see if a premium is charged for credit insurance.  Affected employees may have a valid claim against the insurance company to pay their home loan or motor vehicle finance premiums on their behalf for a period of up to 12 months and should contact their financial advisors and/or credit providers for more information and financial advice.  It must be remembered that every credit life insurance policy is different and that the terms and conditions of the policy should, therefore, be studied carefully.

If you require more information in relation to this topic, please send an e-mail to Johan du Toit at johan@barnardinc.co.za. Johan is a senior associate at Barnard Incorporated.

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