July 2026 Finance Newsletter: The Benefits & Dangers of Credit Insurance

Credit insurance can be a lifesaver in case of retrenchment or death, but many consumers are not aware what it is, how much to pay for it or the fact that they are likely already paying a number of premiums each month for it.

This brief handout will tell you what you need to know to make credit insurance work better for you.

What is credit insurance?

Credit insurance is, as the name suggests, a form of insurance intended to help consumers pay their credit agreements (debt) in case of retrenchment, disability, long-term hospitalistion or death.

Credit insurance premiums are automatically included in most short and long term debts, as well as some short term insurance policies. The price, life events covered and the form of payout, will depend on the specific policy.

The benefits of credit insurance

In exchange for a monthly premium, usually included in their debt instalment, consumers, or their family, can claim payout in case of retrenchment, disability, long term hospitalisation or death.

Credit insurance can be very helpful in settling or minimising debts in the wake of a retrenchment or a loved one’s death. But it will only pay out if you make a claim.

Case Studies: Linda had been diagnosed with cancer, but was still repaying her loans. Once she realised she could claim from her credit life policies on account of her illness, she managed to settle a personal loan of R2000.

After Erik lost his job, he struggled to keep up his debt payments while he looked for a new job. When he started calling his credit providers to find out about credit insurance, he was able to settle 80% of his debt. By the time he had found a new job, he was in a better position than he had been before.

The dangers of credit insurance

The only downside to credit insurance is that there is often a disproportionality between the benefits for consumers and credit providers. This is the reason that credit insurance is prohibited in the UK.

Claims on credit insurance are low because very few consumers will actually suffer retrenchment, disability or death in the space of a six to twelve month short term loan. Furthermore, since awareness of credit insurance is low, even those consumers who do have opportunity to claim rarely do.

As a consequence, some credit providers earn billions every year from credit insurance premiums, while paying out as little as 21% of these earnings in successful claims.

Since there is no maximum prescribed cost for credit insurance, credit providers are free to charge whatever consumers are willing to pay.

Credit insurance is often a condition of taking out a loan and, although consumers are allowed to “shop around” for the best price, most consumers seem to settle for whatever the credit provider is offering.

The National Credit Act and credit insurance

The National Credit Act provides that:

• Credit providers may charge credit insurance

• Credit insurance may be made compulsory on the granting of a loan

• Consumers must be informed upfront of the cost of the credit insurance

• Consumers must be informed of their right to “shop around” for the best credit insurance cost

Sadly, the National Credit Act does not provide a maximum rate for credit insurance, as it does with interest and administration costs, but merely requires that the cost be “reasonable”.

Since no clear maximum is provided, each credit provider is free to decide what they believe is a “reasonable” cost. The implication, however, is that credit insurance costs should be in line with rates offered across the market and the actual cost incurred by the creditor when selling the insurance.

A reasonable, market-related cost should be around R5 per R1000 borrowed.

Recommendations:

Consumers are encouraged to:

1. Find out if they are required to take out credit insurance before accepting a loan

2. Make sure they are not paying more than R5 per R1000 borrowed on credit insurance (and, if they are, to shop around)

3. Always claim credit insurance from as many providers as possible in the case of the retrenchment, disability or death of the policy holder.