Loan Protection Insurance (LPI) on Unsecured Loans

March 20, 2019

HOW often would you have heard the term Loan Protection Insurance (LPI)? Many consumers may have either heard about it when signing a loan document or some may perhaps not know of it at all.

LPI is, as the name suggests, an insurance protection for unsecured loans offered by financial institutions. As disclosed to the Consumers Council of Fiji by one financial institution, Fijian consumers are charged this fee at a general rate of one to three per cent per annum on unsecured loans to cover the borrower (customer), should they fail to repay the full loan amount.  This inability to pay can be due to either death, disability or unemployment.

There are obvious advantages for consumers who pay LPI premiums. Should a consumer, for whatever reason, become permanently disabled or unemployed, they would face difficulty in repaying the money owed. The LPI would then be used to clear the loan thereby ensuring consumers are relieved from the existing financial pressure. Having LPI would also be used as a mitigating strategy for the credit risk lenders, should the specified events occur.

However, a recent research conducted by the Council has found that consumers taking unsecured loans are not aware of LPI and its benefits. It was also identified that consumers were charged for LPI without having full understanding or knowledge about its features and benefits.

Council’s investigation with the lending institution also discovered that there are real issues with the manner in which LPI is charged, eligibility rules for claiming LPI on unsecured loans and with the manner in which financial institutions include these payments in unsecured loan agreements.

Based on the outcome of the research, consumers are urged to seek more information on LPI covers from their lending institution before signing off any agreement. 

Council’s findings on LPI on unsecured loans in Fiji

The Council investigated eight financial institutions which offers unsecured loans to consumers. It was found that there are no standard guidelines but have in-house policies.  However these policies on LPI on unsecured loan differs across the institutions. Out of eight financial institutions, only three offered LPI however, the cover varied according to institution’s internal policies. A detailed findings on the nature of LPI is presented in the table below:

Financial Institution 1–Key Criteria Council’s Findings:
Loan Protection Insurance RateNot Disclosed to Consumer Council
Benefits of LPIIn the event of unfortunate death of the borrower, their loan is paid off thus removing any burden on the family and the next of kin receives $1,000 to assist with funeral expenses.
LPI exclusions If the customers’ accounts are in arrears at the time of their unfortunate deathIf the customers death is caused by suicide or war 
Conditions for claiming LPIDeath certificate of Medical certificate/notification (in lieu of the death certificate) from the hospital confirming the death of the borrower.Birth certificate of Marriage certificate of the next of kin who is deemed to be the beneficiary of the funeral funds. This is to establish the relationship of the beneficiary who will be the widow (widower) or next of kin.A valid primary photo identification of the next of kin 
Financial Institution 2- Key CriteriaCouncil’s findings:
LPI rateRates differ depending on the plans chosen.  A rate of 1.565% is applicable under the Single & Proportional covers and 2.130% under the Multiple cover. 
Benefits of LPIBenefits vary according to type of cover Single: Covers for only 1 insured whereby the whole loan is paid off should the insured die or is permanently disabled. Proportional:  Covers for 2 insured whereby 50% of the loan is paid off should one of the insured die or is permanently disabled. Multiple: Similar to proportional cover but 100% of the loan is paid off should one of the insured die or is permanently disabled. 
LPI exclusionsLPI cover excludes pre-existing conditions, suicide and HIV/AIDS 
Financial Institution 3- Key Criteria Council’s findings:
LPI rateRates and claims made not disclosed to Consumer Council. LPI is optional and only offered if customers is eligible. Once customer confirms preference for a cover, it is on them to decide an underwriter or can go with the financial institutions as long as the cover is of equivalent scope. 

It was found that the claim rate of LPI of one financial institution lending unsecured for 2015 amounted to 441 claims with a loan value of $2,398,699.51.

The Council found that while the LPI terms & conditions were detailed by one financial institution in the customer’s letter of offer and explained by loans officers during the awarding of the loan, the other financial institution did not fully disclose the LPI costing and directly calculated with the principle loan amount without the consumer’s knowledge.  

Consumers at risk

LPI is viewed contrarily by the various financial institutions that offer the policy on unsecured loans.

With Financial Institution 1, it is a value added benefit despite paying out only on certain conditions with no premium refund when term of loan ends. While, Financial Institution 2, there are no disclosures made on the LPI until the actual policy & benefit schedule is sent to the customers.

Financial Institution 3 claimed they only offer LPI to eligible consumers however, Council found that they were actually charging the LPI on all unsecured loans.

These findings show that there are aspects of LPI that pose risks to consumers.

A lack of information provided to consumers is one of the most egregious risks to consumers. They must be informed of LPI rates prior to signing the loan document however this is not always done. The right to prior consent is one of the basic consumer rights however some financial institutions are compromising this by not disclosing the LPI rates until after the unsecured loan agreement has been signed. Other financial institutions do not even make mention of this unless consumers question them.

LPI provided by financial institutions must also cover more than just death or sudden disability. There needs to be an allowance made for terminal illness, redundancy and bankruptcy as these are all legitimate reasons for being unable to repay unsecured loans.

It is also important to note that financial institutions do not pay back the LPI premiums if the consumer pays the unsecured loan in full. This means that the LPI is an additional revenue to the financial institutions. Where is the justice for consumers? On top of paying high interest rates over longer periods of time and exorbitant loan application fees, consumers are then paying a separate non- refundable expense on their unsecured loans.

What can Consumers do?

Consumers must always seek clarification on the total cost of borrowing and the breakdown of fees & charges applicable to their borrowing. It is a consumer’s responsibility to always read their loan agreements before signing so that they are aware of the terms and conditions.

If the terms and conditions of unsecured loans are not to their liking, consumers should shop around with other financial institutions and find one that offers full disclosure on all fees and charges. This will ensure that consumers fully understand their repayments.

Consumers can also seek assistance from the Council if they need help interpreting their loan documents. Consumers who need further advice can contact the council via the National Consumer Helpline on toll-free number 155.