Mortgage Insurance

Your beloved may not be around forever to take care of the home loan, have you planned for this eventuality? We show you how to be prepared.

Death is one of life’s few certainties. Life, most of the time, is uncertain. Perhaps you’re one of those people who fear life more than death. Unfortunately life can be cruel and deliver sudden blows to anyone’s sense of
happiness and general well-being. It’s very often the death of another person, especially a breadwinner, which causes the trauma and despair. It’s usually women who suffer in these situations. Today banks obligate home loaners to take out life assurance and cede their policies back to them to cover the outstanding debt in the event of their sudden death or disablement. It’s not all plain-sailing, however, and you may well need to anticipate certain dangers which could leave your loved one severely compromised.

More importantly, there remain tens of thousands of home owners in South Africa whose mortgage debts remain unsecured by proper life assurance. They’re usually over forty-five years of age and took out their home loans in the days before life assurance became an essential condition of any mortgage. Many of them have faithfully paid off their bonds and reduced their debts to insignificant levels or eliminated them entirely, but there are also
many who have re-accessed their loans or otherwise failed to reduce the original debt. Their wives are most at risk, not least because they have entered the period of their lives where they are most likely to suffer heart
attacks and other life-threatening illnesses.

We’ve Got Life Assurance – So We’re OK. Or Are We?

We’ll begin with the younger generation whose bonds are secured by ceded life policies. What sort of assurance did you take out when you applied for your loan? We’ll bet many, if not most of you, cannot immediately answer this
question. If your bank arranged it through its own insurers it may have given you a reducing-term insurance. These are the cheapest policies, but they have a hidden danger. Your cover will reduce over the next twenty years until there is none left. If you re-access your bond regularly over the years and fail to reduce the
original debt your insurance may prove hopelessly insufficient to clear the outstanding debt on your death.

Level-term policies solve this problem. They keep the cover at the full amount of the original loan but may leave you with nothing when they expire. It’s best to take a life policy that continues indefinitely until your death and will pay out the original sum assured or a much higher amount, depending on which policy you chose. The premiums will be substantially higher but the reward and security to your spouse will be far greater. You may have to decline your bank’s offer of its own insurance and consult your insurance broker to get the ideal policy in place. A simple life policy to secure a home loan debt is a much better option than the investment-portfolio policies and management-linked schemes which are so popular today. These may produce better dividends in time but they are as uncertain as any unit trust or other market-related investment. To clear a basic debt you need a basic insurance which you know will, at any time, wipe out the debt. Endowment-linked mortgages in the United Kingdom have fallen into disfavor as a result of unpleasant experiences many home owners have had with them. What Else Should We Watch Out For? One reason why you should consider taking out an independent policy with your own insurer is the question of future insurability. Ten years from now you may decide to sell your home and buy a much better one. Success in your business ventures may have enabled
you to borrow three times as much as you did for your first home. Good health may not have accompanied your fortunes, however, and as a result of some serious illness you may now not be able to secure adequate life assurance. If your original policy with your bank was a reducing-term or level-term policy for twenty
years only it will prove pretty useless now anyway. To prevent this problem take out a policy for life with a slightly higher premium for guaranteed insurability in future. Many life assurance companies offer specific policies with insurability guaranteed for an increased amount of cover at any time. You can easily get a policy for, say, R500 000 with an option to double it in five or ten years time without any further proof of medical health.

The other potential threat to your wife’s well-being if you should die suddenly comes from re-accessing your loan so regularly that the capital debt never really decreases. In the United Kingdom flexible bonds allow
home owners to underpay their installments or take a month off here-and-there once part of the capital debt has been reduced. This, coupled with the temptation access large lump sums, has led many families into
permanent indebtedness and left many spouses in serious trouble when their breadwinning husbands have died or been disabled prematurely. The Scottish Widows Bank advertises regularly in British financial and mortgage magazines. Its very name tells you its purpose – to ensure bereaved women don’t find their mortgages turning into nightmares. On every advertisement they have a motto which reads like a health warning on most cigarette ads: “Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on
it”. Flexible loans were originally intended to give home loaners control over their finances but far too often injudicious borrowing has bound them to chronic, insoluble debt.

The Older Generation – Securing Your Mortgage Indebtedness

You’re over fifty, have no mortgage insurance, and still owe your bank plenty. Your job may be secure and you’ll have no trouble paying while you remain alive. If you should suddenly pass away, will your wife be able to clear the debt? She is likely to have one major problem – your bank may not allow her to take out a new loan
even if she can afford to repay it. Her years and health may tell against her. How do you protect her right now, especially if you’re in the same boat and cannot obtain further life assurance? There are no easy solutions, other than to suggest that you make a serious effort to pay off your bond as quickly as possible.

This advice may well apply even you took out an ordinary life policy many years ago that may still be sufficient to clear the debt. Life policies these days usually cover most eventualities but guaranteed insurability and disability benefits were invariably separate options in the seventies and were not always added to the basic policy. What if you have a sudden stroke or are disabled in a serious motor accident? Not only may your wife have to find her own employment but she will also have to maintain you as well. In practical terms the mortgage nightmare will be aggravated. In some ways it will be a fate worse than death for her. Do what you can to shield her right now.

It’s surprising to find some banks still offering disability protection as an optional extra. Every new home loan applicant simply must add disability insurance to his policy. For a small extra premium you can protect your good lady from a very unpleasant future. Death and disablement can ruin a woman, but there’s one last danger here to anticipate – divorce! A woman with two or three children may well be left to stay in the family’s original home but how can you be sure your darling ex-hubby is going to pay his share of the monthly bond
installments? You may well be able to tie him down in a settlement agreement by including it in his maintenance payments or as a separate provision, but what if he should pass away suddenly? If you will be taking transfer of the home into your own name make sure he takes out adequate life assurance to cover the full debt outstanding and cedes the policy either to you or your bank. If necessary make sure he signs a debit order to pay the monthly premiums.