CR287 Loans Loan –against policy as security
Loan –against policy as security – interest limit in terms of the
in duplum rule – alternative remedies.
The complainant held a policy with a death value of R1 500 000. He required cash for his business, and in September 2002 he borrowed R41 000 on the policy. In terms of the loan agreement:
o the policy would serve as security for the loan;
o interest would be payable on the loan at the rate of insurer’s policy loan interest rate, which was 14% p.a. – 17% p.a.; and
o if the loan was not repaid, and the loan amount plus interest became more than the cash value of the policy, the policy would be cancelled.
In the period after it was taken out the complainant was unable to make repayments on the loan, and by 2008 the cash surrender value of his policy amounted to
R106 825.00. The compound interest on the loan amounted to R52 292.57, which brought the total loan debt to R93 360.57. On several occasions the complainant contacted the insurer to enquire how long he could postpone repayment of the loan without losing his policy benefits. In doing so he suggested alternatives, such as reducing the death value by the amount of the loan and interest, but the insurer was not agreeable.
The Roman Dutch in duplum rule stipulates that interest stops running when unpaid interest equals the outstanding capital of a loan. The Insurance Act 27 of 1943 had exempted policy loans from the operation of the in duplum rule, but a provision in the new Long Term Insurance Act, which became effective on 1 January 1999, brought an end to the exemption. The insurer had not reprogrammed its systems, however, to take account of the in duplum rule that had thereby become applicable, and had therefore failed to apply the rule to loans advanced after that date.
Because the complainant’s loan had been taken out in 2002, the insurer accepted that it had been legally obliged to apply the in duplum rule to it. It also accepted that an application of the rule would bring down the total debt amount to R82 136.00. This resulted in the writing off by the insurer of interest in an amount of R13 745.26, no further interest being chargeable.
The insurer would have retained the right, however, to part surrender the policy to recover the outstanding debt, but because this would have an impact on the cover amount, and because the insurer conceded that the interest rates had been high, it offered the complainant two options:
1. To reduce the fund account by the interest and capital loan amount and to have the new cover recalculated based on increased risk (because the fund value buffer would reduce). The cover would thereby be reduced from R1 500 000 to
R1 156 000 and the debt would be settled; or
2. To change the loan and interest debt to an interest free loan instead of an interest bearing loan, which would then not affect the cover amount. The debt would still be owed against the policy but with no interest portion.
The matter was settled when the complainant accepted the second option.