What happens when, in a joint income household, one income is unexpectedly lost and the remaining homeowner can no longer afford the bond repayments? Cheap life assurance.
Mike van Alphen, national manager of Rawson Finance, says he has been faced with the tragic plight of a new widow finding that she is expected to continue to keep up with the monthly bond repayments on her home – but now that her husband is dead, she no longer has the income to do this.
In nine cases out of ten, he says the widow then has to sell the home and downgrade to a less expensive unit or become a rent paying tenant again.
Although banks will always insist on a bond holder taking out a homeowners comprehensive policy to cover the home in the event of a fire or storm damage, Van Alphen says this situation arises because they don't always insist that the bond holder takes life insurance, in order to make sure that the outstanding bond is fully repaid should he die.
Life insurance policy types
If the successful bond applicant is thought to be in secure employment and in reasonable health, it is quite possible that the bank will not insist that he has life cover.
"However, our experience has been that cancer and heart attacks often strike people who, in all respects, appear 100 percent healthy and on top of their game."
He says if the deceased’s estate is not large enough to pay off the bond and support the family, neglecting to take life cover is a negligent act, leading to huge hardship for the widow and family.
Van Alphen says certain banks will include life cover in the mortgage, but this is not, in his view, the way to go because it results in the total monthly bond repayments being unnecessarily high and the life premiums that are debited to the bond incur interest. It is far more efficient to keep the life cover separate from the bond and to pay it off with the monthly debit order.
Some of South Africa’s bond originators make life insurance available to their clients at very competitive rates, he says. They do this through associate companies with whom they have a relationship in order to assist the client in protecting his home and family. This is always a proposition that the client should look at, Van Alphen says.
Most bond holders taking out homeowners comprehensive insurance, other than the bank's policy, should note that many insurance companies do not cover the property for damage caused by subsidence or ground movement/landslide. If there is, in the bond holder’s view, any danger of these occurring, a special policy should be taken out to cover them or they must have this included in their current policy.
What do you know about life insurance
He adds that sectional title units are covered by the body insurance, and the sums owing here are recouped via the monthly levies. Separate insurance here is therefore not necessary, but again, should there be a bond on the property, the bond payer should apply for sufficient life insurance to cover the outstanding amounts owing on the bond in the event of his death.