You’re buying your first home, and you’re going to have to insure it - but what’s the deal?
“There are no laws that compel homeowners to insure their properties - but if you’re buying on credit, your bank or financial institution will definitely insist that you insure the buildings, the fences, the paving, the swimming pool, and any other permanent improvements,” said Chris Lindes, a Cape Town-based, registered financial advisor who handles short-term insurance for clients around South Africa.
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Get professional advice
The choice of insurers remains yours, though - and this is where the advice of professionals becomes invaluable.
Financial advisors are required by the FAIS Act (Financial Advisory and Intermediaries Services Act) to study and pass a series of exams and to register with the FSB (the Financial Services Board).
“Both the company that sells insurance and the individual brokers who work for it have to be licensed - and good, professional people will offer to show you their qualifications and licenses without you having to ask for them,” said Chris.
“It’s very important that you get on well with your broker, that he or she establishes a relationship of trust with you from the start, because you’re going to want them to advise you on every aspect of your insurance - from which insurers to use, to what you need to insure, and what you need to do in the case of a claim.”
Establish insurance value
How do you establish the value of what you have to insure?
“You can’t insure the land, but you must insure the improvements on it - and most insurers will ask you to work out the value of the improvements yourself,” said Chris.
“At the very minimum, the bank will require you to carry insurance equal to the outstanding balance of the loan, but this isn’t ideal, so it’s best to ask a local builder for a quote that details the current replacement value of the improvements.
“This is important, too, because insurance contracts generally come with escalation clauses - and the escalation will be calculated on this base price.”
What of the pitfalls?
Chris cautioned against cheap insurance, and also against underinsuring your property.
“You should never choose insurance on price alone,” he said. “Low-cost insurance policies might save you a few rand every month in the short term, but they’ll be expensive in the long term - because you probably won’t get enough out if you ever have to claim.”
Underinsurance is expensive too, because it implies that you’re carrying a part of the risk yourself.
“If, say, you’ve only got one million rand’s worth of insurance on buildings that are valued at R 1.5 million, the insurer will ‘apply an average,’ and pay out only two thirds of the total of any claims,” said Chris.
“You can see how this could end up costing you lot of money.”
Review your poicy annually
Chris advises homeowners to review their insurance profiles at least once a year.
“Your broker will generally send you a reminder when your policies become due for review, and it’s a good idea to sit down with them to check that you’ve covered all the bases, and that you haven’t underinsured anything,” he said.
“If you ever find that you have to lodge a claim, you’ll be pleased that you did.”
