You must take home loan cover, but you can choose where

It is obviously much easier to just say: "Ag - just include it in the bond".

However, you should weigh up all options because it is a life-long commitment that you are making.

Gareth Shepperson
Commercial and Property Attorney

You must take home loan cover, but you can choose where

When you take out a home loan, the lender has the right to insist that you also take out adequate life assurance and homeowner's insurance. This is to protect both the lender and you, the borrower. But you have the right to choose your insurer.

The purpose of life assurance is to cover your outstanding debt in the event of your death, whereas homeowner's insurance is short-term insurance that pays out in the event of damage to your property caused by natural disasters, such as flooding, and accidental damage, such as a burst geyser.

The banks offer credit life cover and homeowner's insurance from a preferred supplier, but it's advisable to compare the cover offered by this supplier with the cover you already have or could buy elsewhere.

If you choose to use your insurer or already have life cover, the bank will insist on the cover being sufficient - in other words, equal to the outstanding amount due on the home loan - and on you ceding your policy to the bank. This is an outright cession and means that the cessionary (the bank) takes precedent and will be paid before any payments to nominated beneficiaries. This means the bank gets first bite at your life assurance proceeds.

Praven Subbramoney, head of product and sales at First National Bank (FNB), says policies that the bank will not accept (for ceding) include retirement annuities, endowment plans, pension plans, provident funds, retrenchment- and/or disability-only policies, and group life assurance cover.

When choosing life cover, you need the best cover that you can afford and should consider insurance that will cover your loan in the event of not only your death, but also disability, dread disease or retrenchment.

Subbramoney says that one of the benefits of taking out cover from your bank's preferred insurer is that the sum insured is based on the outstanding balance, which only your bank has sight of. There's nothing stopping you from notifying your own insurer of your outstanding balance, but you can easily forget to do this and find that are under-insured if you have dipped into your home loan, for example.

With homeowner's insurance, Subbramoney says you may use an insurer of your choice, as long as the bank's minimum requirements are met. In FNB's case, this means that FNB's 'interest' must be noted; meaning that if your policy lapses your insurer must notify FNB and if you have a big claim for something like subsidence, FNB must be notified. FNB also insists on you having Sasria cover and personal liability cover, as well as the prescribed sum insured as per your home loan agreement.

If you use an insurer other than the one recommended by the bank, he says you will be required to provide the bank with an updated policy following the renewal month of the policy on an annual basis.

FNB does not charge you a fee to check your policy if it is not with FNB's preferred insurer.

Subbramoney says it's important to remember that the bank has no influence over the insurer in the event of a claim.

Steven Barker, head of home loans at Standard Bank, says that a claim will fail if the damage was the result of inadequate maintenance. 'When buying a property, look out for potential problems with regards to roofs, drainage systems, pipes and geysers, and cracks,' he says.

Personal Finance


Denny Crane

Denny Crane
It's not me ... yet. Denny Crane from the TV series Boston Legal. Click on picture if you're not sure who he is!