When the bank grants you a bond to buy a home you will be certain to receive telephone calls from insurance brokers urging you to take out sufficient insurance to cover the full cost of the home in the event of its being destroyed by fire, storm or any other cause.
This is known in insurance circles as an HOC (Home Owners Comprehensive) policy.
Rob Lawrence, national manager for Rawson Finance, says the bank has a vested financial interest in the property that is the underlying security for its mortgage bond. This means it has a right to and will always insist that such an insurance policy is taken out to protect its asset in the event of the home being damaged. This does happen more often than most people realise.
Often the bank will try to persuade the new owner to take out insurance through one of the bank’s agents, but you have the right to shop around to try and find a similar policy at a better rate, if that is possible. This, incidentally, is fairly frequently the case, says Lawrence.
“However, if a non-bank policy is taken out, bondholders should be careful to ensure that it meets the criteria specified by the bank. Although price is important, so too are the conditions and the coverage given.
“The new owner can then expect a second series of phone calls from brokers – and these will relate to insurance known as the HMP Policy (Home Mortgage Protection) policy. The brokers here will be trying to sell the new owner a life insurance policy large enough to cover the full sum still outstanding on the bond should the owner die.
“This type of policy is not, however, compulsory, but neglecting to take it can lead to serious problems. Certain homeowners will not accept the second policy as it is seen as a grudge purchase - and the banks in this case have no right to insist that they do so, unless they have made it a condition of granting the bond. That, however, is a very big mistake.
“Any review of the home mortgage bonds in South Africa will show that time and again the surviving spouse, children or other dependants on the homeowner have found themselves without sufficient funds to continue to service the bond after his death. This inevitably means that before long the home will have to be sold – or will be repossessed by the bank, leaving the dependants without a home.”
No matter how difficult it is to meet the insurance payments, Lawrence says, the homebuyer should take out a life policy to cover every rand still owing on the bond. Not to do so is almost criminally negligent. Unless the owner has ample assets, it is bound to cause distress to the surviving family members.
Lawrence says the cost of this life insurance can be kept down if it is taken out on a no-benefits payback basis, that is if it is paid out only in the event of the policy holder dying.