Interest on an 18-year-old policy loan ballooned eleven-fold. Picture: 123RF/ALLAN SWART
Interest on an 18-year-old policy loan ballooned eleven-fold. Picture: 123RF/ALLAN SWART

The Ombudsman for Long-Term Insurance has stepped in to rectify a life assurer’s unfair interest charges on a loan taken out from a life policy.

At the crux of the argument between the life assurer and the ombud was whether the “in duplum rule” — which puts the brakes on the amount of interest that can accumulate on a debt — applies to a policy loan and how it must be applied.

In a final determination against Momentum Life, ombud Judge Ron McLaren found that the in duplum rule applies to any debt that arises out of a loan or advance granted after January 1 1999, when the Long-Term Insurance Act came into operation and that the rule is not limited to interest that is in arrears as argued by the life assurer.

Mr W, a policyholder, borrowed R5,000 against his life policy in 1999 from then Southern Life Insurance, which later merged with Momentum Life. He never made repayments on the loan on the assumption that his monthly premium would be adjusted to incorporate the monthly loan repayment.  

Only in 2017, when Mr W inquired about another policy, did he learn that the loan had never been repaid and that interest on it had ballooned eleven-fold to more than R55,000.

Mr W told the ombud that he was never informed by the assurer that he had to make separate repayment of the loan amount and that he had never received any correspondence from the assurer over the years.

The assurer argued to the ombud that it was entitled to claim interest on an unpaid loan granted because, in its view, the in duplum rule only applied to arrear interest, and in a policy loan there is no arrear interest.

Policyholder borrowers can repay all or part of the loan debt at any time. When a benefit becomes payable under the policy, the outstanding loan debt is deducted from the benefit amount. If the debt becomes equal or greater than the cancellation value of the policy at any time, then the policy is canceled, the assurer explained.

Policyholder borrowers are only obliged to make repayments if they specifically choose to do so. Interest payments are only due when they are paid. Therefore, repayments are never unpaid and in arrears, and the loan never goes into default, it argued.

McLaren disagreed with Momentum’s arguments and found that Mr W’s loan agreement referred to him having to pay interest on the capital. It also stated how interest was calculated and to be paid, which was within 30 days of each anniversary date of the policy. In the words of the loan agreement, interest was payable (and in arrears), and by law Mr W would have been entitled to the protection of the in duplum rule, McLaren said.

Instead of collecting that arrear interest, the assurer, since the inception of the policy advance, accrued it to Mr W, he added. He also said that the Long-Term Insurance Act, which came into effect in 1999, did not exempt policy loans from the in duplum rule as former insurance legislation did.

The in duplum rule protects debtors from being buried under a mountain of debt. The rule — which has a dual purpose — permits a creditor to recover double the capital advanced to the borrower while it also seeks to alleviate the plight of borrowers in financial distress, he said.

McLaren ruled that Momentum must apply the in duplum rule to Mr W’s loan and his loan balance had to be adjusted. He turned down Mr W’s request that no interest should apply on the basis that Momentum Life failed to inform him about the status of his policy after the loan had been granted.

McLaren said. that the complainant had a duty to inform the insurer of any change of address and it would be unfair if the insurer was deprived of all interest on the loan.