Can I Use Life Insurance to Cover My Bond?
Buying a house? Your loan provider may ask you to get life insurance that covers your bond. Often banks and other financial institutions may offer you life insurance plans that cover your bond during your application for a home loan. They do this to ensure payments are covered if you should pass away, become terminally ill, or become disabled.
Do I have to Purchase a Bond Life Insurance Policy from the Bank?
Did you know that under the Consumer Act you don’t have to get bond cover with the bondholder? You can take out an independent life insurance plan designed to cover your bond. The only snag is that the policy must be ceded to the bank. Here’s how it works.
What is Bond Life Insurance?
In South Africa, bond life insurance is a life insurance policy designed to cover the bond repayments of your home loan should you pass away, become terminally ill, or become disabled. If you are no longer able to pay your bond because of one of these insured events, bond life insurance should pay out to protect the financial future of your family.
Is Bond Life Insurance the Same as Life Insurance?
Bond life insurance and life insurance are similar but not the same. Life insurance is made to cover your income and usually increases over time as you age. Bond life insurance is made to cover only your bond, and cover requirements often decrease with time.
Life insurance is calculated by considering your income replacement requirements, your age, and your risk profile. Bond cover, however, is only for a specific liability. Bond cover is made to mitigate risks related to your home loan debt, but life insurance covers other risks too.
How It Works
If you have an existing life insurance policy, sometimes the policy allows for extending your cover to include your bond. This option may be ideal if your life insurance provider allows you to cede the loan amount to your loan provider. If you choose not to amend your existing policy, you can get another one to cover the loan amount.
Homeowners who do not have a life insurance policy yet can purchase one specifically to cover the loan amount. There are varying policies available, so it is wise to compare offers before choosing. Some insurance providers may include disability and dread disease cover, while others may exclude events like suicide.
Once you have chosen a life insurance provider, you typically need to nominate your bank or home loan provider as the cessionary (the person who receives the transfer or payout from the insurer) of your policy. When you cede the policy to them, it means if you should pass away, they will be the sole beneficiary. Sometimes a policy may contain more than what is owed to the loan provider, and in that case, your insurance provider should be informed of what amount should go to the bank or loan provider.
The loan amount decreases with time, but the ceded amount does not automatically decrease. We suggest reducing the ceded amount annually. You will need a letter from the loan provider stating how much you still owe. When your bond is paid up, you can get a cession cancellation letter. You can then nominate your own beneficiaries for the life insurance policy.
Is Using Life Insurance to Cover Your Bond Compulsory?
In South Africa, many banks and loan providers require that you get life insurance to cover your bond. Each bank has different rules, but all are subject to the Consumer Protection Act. ABSA often insists on their Home Loan Protector Plan as the compulsory method of insurance, while Nedbank only insists on life cover for loans up to R600,000 currently.
Banks may insist on life insurance that covers your bond if your monthly salary is less than a predetermined amount. The same goes for the loan amount. If the price of the property or the registered bond amount is lower than a predetermined amount, you may be obliged to get life insurance to cover your bond.
Whether or not your bank requires it, life insurance to cover your mortgage is a wise decision. If your current insurance does not cover your home while you still need to repay the loan, you will need extra cover. The idea is to mitigate the risks your household may be exposed to if something unforeseen happens. You can make sure your family doesn’t lose the house if you pass away unexpectedly with this type of cover.
When Does It Pay Out?
Bond or mortgage life insurance pays out when an insured event occurs. Death is usually included, but not all policies include unnatural causes, dread disease, disability, and terminal illnesses. The policy you choose will lay out exactly what is and isn’t covered. Make sure you choose a policy that covers all your risks before you sign.
Can I Cancel It?
Usually life insurance policies designed to cover home loans can be cancelled at any point without having to pay a penalty fee. Remember, if you cancel your life insurance policy, you may lose the money on the policy.
How Much Bond Life Insurance Do I Need?
One usually needs enough insurance to cover the amount still owing to the loan provider.
DISCLAIMER: The information provided in this article is meant for informational purposes only and should not be construed as legal, medical, or financial advice. Facts stated in this article are correct at the time it was published.
Sources: ReMax; PrivateProperty; ooba; 1Life;