Buying your first home is both an exciting and daunting experience. Dealing with estate agents, banks and lawyers during the bond approval transfer process can be nerve-wracking, during which time you will probably be faced with more paperwork and information than you can conceivably process. Most people are so anxious at this stage that they just sign where they are told to sign.
Comparing the cost of cover
I have a young client, Mark, who recently purchased his first home. He received his bond statement from his bank and was perplexed as to why his loan amount was not decreasing. Mark asked his mother to have a look at the statement to see why this was happening. They discovered that he has life and disability cover on the loan and this premium was part of his loan repayment to the bank. This premium was a budget-straining R1 017.99, a hefty sum for a young man aged 23 who has only recently started to earn an income.
I researched and prepared a couple of quotations, comparing various insurers’ cover to the bank’s cover, and discovered that the life cover premiums of Insurer A were about two-thirds cheaper than the bank’s premiums, and those of Insurer B. Not only is the cover more appropriate for his needs, it is also much more affordable and flexible.
|Benefit||Insurer A||Bank/Insurer B|
|Value of life cover||R900 000 increasing at 5% per annum||R810 000 reducing|
|Temporary illness or disability cover||14-day waiting period||One-month waiting period|
|Temporary illness or disability cover||R20 000 after-tax monthly income increasing at 5% per annum||Equal to the amount you had to pay in terms of the loan agreement for the month before you became temporarily disabled, that is, your bond repayment|
|Permanent illness or disability cover||Paid out after 24 months if you have not recovered from illness or disability, until you recover or turn 75||Paid out after 12 months; thereafter the outstanding amount of the bond will be paid to the bank as a lump sum, only if disability is deemed to be permanent|
|Critical illness income cover||30% boost to your temporary illness / disability income benefit for 12 months irrespective of whether you return to work or not||No benefit|
|Premium guarantee rates||Guaranteed for 10 years on life cover and for five years on income replacement benefits||Insurer B does not guarantee premium rates and reviews them at least once a year|
|Retrenchment cover||No cover||Insurer B will pay the retrenchment benefit to the value of your monthly bond repayment to the bank monthly|
|Premium per month||R302.90||R1 017.99|
The problem with the bank’s policy is that only covers itself for the outstanding loan amount. Should Mark die or become disabled, the life cover or the income replacement cover is paid straight to the bank to cover his bond. As the bond decreases, so the cover amount decreases. The premium does not decrease though; it may even increase as it is not guaranteed.
With the bank’s policy, Mark is not covered for his living expenses should he be unable to work. Of course, it is great that his bond will be paid, but what about him? How will he afford to carry on living?
The bank’s contract wording states that Mark had 30 days to cancel the policy and take up cover elsewhere, which he must then cede to the bank. Unfortunately, he did not realise this as this was his first experience with purchasing a home. Trying to cancel the cover with the bank has been an uphill battle even though he has implemented alternate cover which is much more comprehensive, and it covers not only the bank but also himself. Although the new policy has been ceded to the bank - which they gladly signed and accepted – it has refused to cancel his cover because he does not have retrenchment cover. Mark works in a family-owned business, so retrenchment cover is moot.
While many bank clients report a similar experience to Mark, to be fair, not all banks have the same policy. Despite this, there is a lesson in this story.
When buying a home or car and financing a loan, you will be required to sign numerous documents. Read the documents, ask questions, know your rights and get information. Don’t be pressured into taking the bank’s cover which is a much more expensive option as you don’t go through the medical underwriting process, which means your premiums are based on the worst case scenario.
Take your time and don’t rush. Make sure that you are in control of the relationship with your bank and are equipped with the right information. Consult your financial advisor when you have big decisions to make such as buying a home to ensure you are not inadvertently signing up for more costly options.
This article was published on Maya on Money, "How to save on home loan insurance".