Credit Life insurance in Nigeria: Meaning, Cost & Benefits

Have you ever taken out a loan from a bank or financial institution in Nigeria? If so, you may have been offered or even required to purchase something called “credit life insurance.” But what exactly is this type of insurance, and is it really worth the extra cost?

Many borrowers find themselves wondering about the meaning, costs, and potential benefits of credit life insurance. Let’s start by addressing that very question – what is credit life insurance, and how does it work?

If you understand the basics, then you’ll be better equipped to determine if this insurance product is a wise investment for protecting your finances and loved ones should the unexpected occur while you have an outstanding loan balance.

THE MEANING OF CREDIT LIFE INSURANCE

Credit life insurance is a type of insurance policy designed to pay off the outstanding balance of a loan in case the borrower passes away before fully repaying the debt.

It provides financial protection for the borrower’s family or beneficiaries, ensuring that they are not burdened with the responsibility of repaying the outstanding loan amount.

HOW DOES CREDIT LIFE INSURANCE WORK?

When you take out a loan, the lender may offer you the option to purchase credit life insurance. If you choose to do so, you will pay an additional premium along with your regular loan installments. The premium amount is typically calculated as a percentage of the outstanding loan balance, and it decreases as you continue to repay the loan.

In the event of the borrower’s untimely death, the credit life insurance policy kicks in and pays off the remaining loan balance to the lender. This means that the borrower’s family or beneficiaries are not responsible for repaying the debt, providing them with financial relief during a difficult time.

IS CREDIT LIFE INSURANCE MANDATORY IN NIGERIA?

In Nigeria, credit life insurance is not mandatory by law, but many financial institutions may require borrowers to purchase it as a condition for obtaining a loan. This is because the lender wants to protect their investment in case the borrower passes away before fully repaying the debt.

However, it is important to note that while lenders may strongly encourage or even require credit life insurance, borrowers have the right to choose whether or not to purchase it.

Lenders cannot force borrowers to take out credit life insurance from a specific provider, and borrowers are free to shop around for the best coverage and rates.

THE COST OF CREDIT LIFE INSURANCE IN NIGERIA (2024)

The cost of credit life insurance in Nigeria can vary depending on several factors, such as the loan amount, the borrower’s age, and the insurance provider.

Generally, the premium is calculated as a percentage of the outstanding loan balance, and it decreases as the loan is repaid.

For example, if you take out a loan of ₦1,000,000 (approximately $630 USD) and the credit life insurance premium is 1% of the outstanding balance, you would pay ₦10,000 (around $6.30 USD) in the first year of the loan. As you continue to repay the loan, the premium amount would decrease accordingly.

It’s important to note that while credit life insurance provides valuable protection, it can add an additional cost to your loan repayments. Borrowers should carefully consider the potential benefits against the cost and determine if the insurance policy is worth the investment.

BENEFITS OF CREDIT LIFE INSURANCE IN NIGERIA

While credit life insurance comes with an additional cost, it offers several valuable benefits for borrowers and their families:

• Financial Protection: The primary benefit of credit life insurance is the financial protection it provides to the borrower’s family or beneficiaries in case of the borrower’s untimely death. By paying off the outstanding loan balance, the policy ensures that the family is not burdened with the responsibility of repaying the debt during a difficult time.
• Peace of Mind: Knowing that the loan will be paid off in case of an unfortunate event can provide borrowers with peace of mind and a sense of security. It allows them to focus on their financial goals and obligations without worrying about the potential burden on their loved ones.
• Loan Approval: In some cases, lenders may require borrowers to purchase credit life insurance as a condition for loan approval. By agreeing to this requirement, borrowers increase their chances of securing the desired loan.
• Simplified Claims Process: Credit life insurance policies typically have a straightforward claims process. The beneficiary or family members only need to provide proof of the borrower’s death, and the insurance company will pay off the outstanding loan balance directly to the lender.

DRAWBACKS AND ALTERNATIVES TO CREDIT LIFE INSURANCE

While credit life insurance offers valuable benefits, it’s essential for borrowers to carefully evaluate their individual circumstances and consider potential alternatives. Here are some factors to keep in mind:

• Existing Life Insurance Coverage: If you already have a sufficient life insurance policy in place, it may provide enough coverage to pay off your outstanding loans in case of your death. In such cases, purchasing additional credit life insurance may not be necessary.
• Term and Repayment Period: Credit life insurance policies typically cover the term of the loan. If you plan to repay the loan quickly, the cost of the insurance may outweigh the potential benefits.
• Age and Health: The cost of credit life insurance may be higher for older borrowers or those with pre-existing health conditions. In such cases, it’s important to evaluate the cost-effectiveness of the policy.
• Debt-to-Income Ratio: If your outstanding debt is relatively low compared to your income and assets, your family may be able to manage the repayment without the need for credit life insurance.
• Alternative Coverage Options: Explore other insurance options, such as term life insurance or mortgage protection insurance, which may provide more comprehensive coverage at a potentially lower cost.

CONCLUSION

Credit life insurance can be a valuable financial tool for borrowers in Nigeria, providing peace of mind and protecting their loved ones from the burden of outstanding debt in case of an untimely death. While it comes with an additional cost, the benefits of financial protection and simplified claims process can make it a worthwhile investment for many individuals.

However, it’s essential for borrowers to carefully evaluate their individual circumstances, consider alternative coverage options, and weigh the potential benefits against the costs before deciding to purchase credit life insurance.

All you have to do is to understand the meaning, costs, and benefits of this type of insurance. With this, you can make an informed decision that aligns with their financial goals and priorities.

We wish you the best!