Life Insurance and Your Home Loan

The home loan is a marvellous credit facility: It grants you access to home ownership, it allows you room to manoeuvre, and – best of all – it is inexpensive.

But, there is a trade-off. In order to grant you such a disproportionately large line of credit at such an exceptionally low rate of interest, the bank will use the home you just purchased as security to make up for some of the risk. What this means in practical terms is that they have claim to your property until you have paid the last cent on your mortgage.

But, this is not the only risk the bank will want to mitigate. They also want to ensure that the mortgage will be paid should you die.

Although you could probably argue that their claim to your property should be security enough, you should bear in mind that your bank does not want to own your property – it is not their business. They prefer the money, not the box. So, to ensure that they get paid and don’t end up being burdened with the sale of your property should the unforeseen happen, they are going to insist that you have life cover.

This whole life cover issue used to be a bone of contention between the bank and mortgage applicants. The reason for this is that the banks – having realised that there were some rich pickings to be made from life insurance – tried to force applicants to purchase additional life insurance via the bank’s own internal brokers instead of allowing applicants to cede their existing policies or to purchase and then cede additional cover via their own insurance brokers.

The NCA changed all this. In a nutshell, the rules are now as follows:

Although banks are still allowed to make life insurance a home loan qualification criterion, they are no longer permitted to pressurize their customers into purchasing life insurance through their own in-house brokers.

The banks have to accept the cession of one or more of your existing life policies, provided that the policies meet the bank’s minimum criteria (i.e. term, amount of cover etc).

You will be entitled to source and purchase life insurance for the purposes of covering the bond from the broker or the insurer of your choice. Once again, the policy has to meet the bank’s minimum insurance criteria of term and cover, amongst others.

Of interest is that some of the lenders have found loopholes in the NCA’s mortgage insurance rules. For instance, one of the four major banks presently has fixed interest rate home loan products where the life cover is built into the interest rate applied. The applicant will obviously have no option but to accept the interest rate offered, and when he or she does, the life cover is activated automatically.

Fortunately, most banks have been less creative and remain strictly within the ambit of the Act. Even though you are likely to be offered their products as an option, they will refrain from coercing you into purchasing additional cover through their brokers.

Here are a few hints that may come in handy when you need to deal with home loan insurance:

To cede or not to cede: If you have ‘spare’ life cover, you can put it to work by ceding it to the bank. If you don’t have ‘spare’ life cover, avoid using your existing policies. It is no good settling the mortgage, but then leaving your family in a situation where they may have to sell up in order to meet the plethora of expenses associated with the winding up of an estate, or even worse – just to survive.

The insurance policy: If you need to purchase additional life insurance, you may want to consider credit life insurance. Credit life was purposely designed to cover instalment debt. The most attractive elements of this type of policy are that the premium decreases in concert with your debt, that it is relatively inexpensive and that you normally won’t need to provide proof of your health.

Disability: Permanent disability could leave your finances hamstrung. Even if you have group life insurance at work, the disability cover will normally only be 75% of your basic salary. This could result in you not being able to meet your home loan repayments. To mitigate this risk, you may want to add a disability benefit to your life insurance policy.

Where to buy: You can buy your insurance through your broker, an insurer’s agent, online, or from the bank. Do some comparison shopping to see who has the best rates and go through the terms and conditions with a fine toothcomb.