A home loan is a form of secured lending. This means that the cash the bank is lending to you, as the applicant, is secured by the property you are purchasing: if you default or die they can repossess your home, sell it and recoup the money they loaned to you. Simple, right? Not really: the listing, selling and actually getting the cash back can take months. The banks hate this process. They are, after all, in the money business and not the property business. And what if the property is destroyed by fire or flood? What happens to that security then? This is where insurance and assurance come into play.
Insurance Vs Assurance
If you’re like me you might have seen both these words and thought they were interchangeable. When used with reference to “life cover” they generally are interchangeable but going forward there is a subtle difference that you (and I) should keep in mind:
“Insurance” pays out if an event happens (think fire or flood insurance) and determines the pay-out based on actual losses. Home Owner’s Cover (HOC), which covers the replacement value of the structure in the event of damage or destruction, is therefore a form of “insurance”.
“Assurance” offers coverage for an event that will happen (like death) and the pay-out time and amount is predetermined. If your policy pays out only in the event of your death (whatever the cause) then it is a life assurance policy. (If it pays out only in the event of your death by bear attack then it is an insurance policy. The bear attack is not necessarily a certainty.)
Most life policies have an assurance component (pay out for death) and an insurance component in the event of specific causes of death (crime, extreme sports etc.) and/or they might also cover possible disability.
Life Assurance and Home Loans
Home loan applicants will not always have to have life assurance to qualify for a home loan. Even so, we advise all our clients to get some form of cover in the event of their death or disability in order to protect themselves and their families from having their home sold out from underneath them by the bank.
While it isn’t always possible to determine which clients the bank will require life assurance from there are a few specific cases in which we know, from the start, that it will be a condition of the home loan agreement. These cases are as follows:
If the client falls under the affordable housing category, i.e. if they earn a salary of less than R20 000 per month.
If the home loan amount is under R1 000 000 (this is a blanket policy regardless of income or what the purchase price of the property is).
Like ABSA life assurance is necessary if the applicant falls into the affordable housing category. In this case if they earn a salary of up to R18 600.
Life Assurance is compulsory where the purchase price of a property is R500 000 or less.
If applicants in the situations listed above have an existing policy that covers the bond amount, this policy can be ceded to the bank. By “ceded” we mean that the bank is given control of the policy (for the term of the loan). In the event of the policyholder’s death the bank will manage the funds paid out by the insurance company and use those funds to settle the outstanding home loan debt first. Any remaining funds will then be paid over to the estate of the policyholder.
In the event that an applicant does not have insurance the bank will offer its own life cover options, but it is not compulsory to take up the bank’s offer. The applicant is at liberty to arrange such life cover through an insurer of his own choice, the only requirement is that the applicant holds a policy that covers the loan amount.
Home Insurance and Home Loans
Unlike life assurance, HOC is compulsory for all applicants. HOC covers the minimum replacement value of the buildings and outbuildings (the bricks and mortar) and any improvements (i.e. boundary walls etc.) erected on the property and represents the cost of replacing on the same site, improvements of the same kind. Essentially HOC provides security for the very thing that secures the bank’s loan.
In the case of a home loan over a unit in a sectional title complex (e.g. apartment, dwelling in a security village), the Body Corporate arranges the HOC and each owner’s portion of the premium is covered in the monthly levy. When buying a free-standing property, the bank will offer their own insurance but, once again, it is not compulsory for the client to accept the bank’s quote. The applicant is at liberty to arrange the HOC through an insurer of his choice. The policy document must, however, be provided to the bond registration attorney who will forward it to the bank’s Legal Department for approval.
The bottom line:
If it were possible to get a home loan without HOC and your house was destroyed (in a fire, say) you would be homeless and still owe the bank potentially millions of Rand. And similarly without life cover you could die leaving your family in debt and potentially facing eviction, probably the exact opposite of what you had envisaged when looking for a home. So, despite the cost of a monthly premium, if you’re thinking about getting into a significant amount of debt to purchase a property you should definitely be looking at getting insurance.