Is Life Insurance Compulsory when taking out a Bond
When you buy a house and obtain finance in the form of a Bond or Home Loan, the bank will make it a condition of grant that you have Homeowners Insurance. Homeowners insurance provides you with cover should you suffer any damage to the actual building. The bank needs to know that if your house burns down to the ground there will be sufficient cover to repay the outstanding amount on your bond. Homeowners insurance is therefore compulsory.
Is life cover compulsory as well? Life cover will ensure that in the event of your death your bond is fully paid off. Leaving your loved ones with a roof over their head without the stress of having to pay off a bond is indeed a great legacy.
So, can the bank insist on life insurance cover for your bond? Life insurance is generally not compulsory, but the banks will make it a condition of granting a bond in some instances. Requirements differ from bank to bank but most banks will require first time buyers to take out life insurance to cover their bond.
What does the law say? “Conditional selling”, such as insisting on insurance cover on a credit agreement, was first covered in the Insurance Act of 1943 and later in the Short-Term and Long-Term Insurance Acts of 1998. It states that the debtor must have ‘free choice’ with reference to the insurer and the intermediary through whom they take out a policy. The consumer must have the choice of taking out new insurance or using an existing policy, as long as the value of the interest of the creditor is met. The policy must be ceded to the credit provider to protect their interest.
The National Credit Act of 2005, which was fully implemented in 2007 states that a credit provider may require a consumer to maintain credit life insurance but that the cover required should not be more than the outstanding debt. Consumers therefore have the right to take out a reducing term life insurance policy; the cover reduces in relation to the outstanding balance of the home loan. This type of insurance cover is cheaper than other life policies. Mortgage Protection is a specific type of insurance policy that falls into this category.
The consumer does not have to take out reducing cover, but the cover may not exceed the full value of the property. According to the act the credit provider must not force the consumer to maintain “unreasonable” insurance or at an “unreasonable” price.
Free choice is a very important condition in terms of the act. Where credit providers propose a specific policy of credit insurance to you they must advise you that you have the right to refuse the proposed policy and to substitute it with one of your own choice.
With the life insurance policy you can take out additional cover for disability and retrenchment. Some of the products on the market do not require a medical examination. If it is a level term policy the value does not reduce in relation to the balance of the home loan. Let’s say you take out a level term policy for R500 000 and the balance of your home loan is R300 000 at the time of your death, the amount of R200 000 will be paid to your beneficiaries after the home loan has been settled.
According to the Banking Ombudsman, Neville Melville, his office has dealt with numerous tragic cases over the years, where the surviving spouse wanted to sue the bank as there was no life cover in place. It is not the bank’s duty to ensure that you have life cover in place, where they do so, it is to protect their own interest. He advised homeowners to check if they have the cover, should it be required.
Discuss your insurance options with your insurance or financial broker before accepting credit life cover policies. You may be sufficiently covered already or can obtain cheaper cover elsewhere.
Protect yourself and your loved ones