PROTECT YOUR HOMELOAN
Many South African home owners neglect to take out insurance as a means of
protecting their home loans; however this is often the result of a lack of
affordability.
The Ombudsman for Banking Services has asked banks to ensure that borrowers
clearly understand the different types of insurance available, and know whether
or not they actually have life cover in place to cover the outstanding bond debt
in the case of death.
"While there's no doubt that a lack of understanding or communication is partly
to blame for the shortfall in bond protection in many instances, the problem is
often exacerbated by a large number of home owners who,
already reeling under the pressure of servicing their bonds, cannot see their
way clear to handling any additional expenses," said Gareth Kitto, Head of Value
Added Services for Bond Choice. "Life insurance is generally not compulsory,
although the banks do insist on it in some instances, such as first time buyers
or if the bond being requested is lower than a certain amount," he added,
pointing out that requirements differed from bank to bank.
Kitto said further that many home owners were unaware that there were
alternatives to life insurance since mortgage protection was a relatively new
concept that had not been widely publicised. People also did not always
understand the implications of their families being left destitute in the event
of their death, serious illness or disability, he said. "If the breadwinner dies
without having life insurance or any form of bond protection in place, the banks
will have to ascertain whether the remaining family members would be able to
afford to raise a
bond on the property in their own names. If they can't afford to do so, the home
loan will have to be called in."
In the event that the breadwinner did have life insurance, he added, the
beneficiaries could use the money to settle the home loan, although this often
meant redirecting money that had originally been intended to cover
loss of income. "In these instances, the beneficiaries normally end up having to
sell the house and moving somewhere more affordable," he warned.
Mortgage protection offers an inexpensive alternative to life insurance, and has
been created to fulfill a specific need in the market. "One of the major
advantages of a mortgage protection policy is that if the breadwinner dies, the
money will be paid directly to bank to settle the home loan. Any remaining funds
will then be credited to the estate or beneficiaries," he said. Other major
advantages were that mortgage protection offered installment cover in the event
of illness or injury, and no medical examinations were required.
A cause for concern are the tragic cases that occur from time to time, in which
the wife of the deceased borrower suddenly discovered, for a variety of reasons,
that there was no life cover in place even though she or her husband had assumed
there was. In most instances the bank had done no wrong, although it's a common
misperception that the banks were obliged to make sure that life cover was in
place. If a bank does require insurance cover, it does so to protect its own
interests. It is advisable for home owners to check whether they do have the
necessary cover required by the bank. Many already have adequate insurance cover
at good rate so they do not need the extra cover.
Commenting on Bond Choice's own mortgage protection product, BondAbility, Kitto
said that the premiums had been designed to be affordable for the man in the
street, who, at age 35, on a R800 000 bond and whose monthly salary was around
R15 000, would pay in the region of R248 a month. (Premiums varied according to
the applicant's social-economic and smoker classifications.) "One doesn't need
expensive life cover to protect your most important asset," he said, adding that
Bond Choice had instituted a policy of offering protection to all their clients.
