Insuring your bond when buying a house

Financial planner Hesta van der Westhuizen tells you why it is a good idea to insure your bond when buying a house.....

Buying a house is usually one of the most exciting things you will ever do in your life. But the time between seeing the house on a Sunday afternoon show-house hunting trip, and actually moving into the house involves at least half-a-tree‘s worth of paperwork.

What you should look out for though, is an application form for life assurance amongst all the documents which the bank lending you the money to buy the house requires you to sign.

The bank wants your bond insured so that in the event of your death they can get their money back

We are often asked if the bank is allowed to demand that the applicant takes out life assurance before they will grant the bond.

The answer is yes; the bank has the right to set whatever requirements they want before they will lend you the money – and if that is a life assurance policy, you need to provide one.

However, what the bank is not allowed to do is prescribe which life assurance company you should use.

Why do I need life cover to take out a bond on a property?

Apart from the bank wanting to make sure that they get all their money back in the event of your death, by making it a prerequisite before granting you the bond they also ensure they get the money back quickly and easily.

As the policy is usually ceded to the bank, the life assurance company will pay the money directly to them as soon as the claim is admitted – and your bond is then settled.

If there is no policy to ensure this, the bank has to wait until your estate has been finalised before they can expect their money back. And this is a process that could take years.

What happens to the policy if I have paid part of the bond and then die?

In the event of your death, and if the bank holds a policy as security against the bond, the bank will take from the proceeds of the policy the amount that is still required to settle the bond, and pay the rest to your estate.

If you manage to repay the bond during your lifetime, make sure the bank cancels the session on the policy and give you the policy back.

If the bank does not require a policy, do I still need life cover to cover the bond?

Even if the bank does not require a policy, it might be a good idea to have life cover in any case equal to your bond which will pay out if you die or become disabled. In the event of your death, the bank will recall the bond.

If your estate does not have enough cash or other assets that can be sold to repay the bond, the bank will demand that the house itself be sold. This could leave your dependents without a place to stay.

Say, for example, you want to leave your house to a family member. Generally you cannot leave them the property with the bond still over it – you cannot bequeath your liabilities. So in order to leave them the house unencumbered, it would be a good idea to take out life cover so that the bond can be repaid, and they can inherit the property bond-free.

If you do not have dependents, or do not want anybody in particular to inherit the property, a policy to repay the bond in the event of your death might not be necessary.

Do I need to take out a new policy?

Even if the bank manager requires life cover before granting you the bond, it might not be necessary to take out a new policy. If you have another policy that you can cede to the bank for this purpose, the proceeds of these might be sufficient to repay the bond in the event of your death.

However, if you have previously nominated another person to receive the proceeds of the policy in the event of your death, and you now cede this policy to the bank, the cession takes preference.

The life assurance company will first pay the bank, and if there is any money left over after the bond has been repaid, they will then pay the rest of it to the person you nominated as beneficiary.

This could be a problem if, for example, the money was meant to support your dependents in the event of your death, but will not be enough after the bond has been paid.

Buying a house might be a very good reason to visit your financial planner

He or she can confirm if you need additional life cover for the bond, or not. They can also make sure if you use an existing policy to cover the bond, that it is not harmful to the rest of your estate plan.

Also, the price of cover and the type of benefits available have changed so much over the years, a reconstruction of your life cover portfolio might be to your advantage – something you financial planner should be able to help you with.

About the author

Hesta van der Westhuizen CFP ® is a Certified Financial Planner and has a BCom-degree.
*** Consolidated is a national financial planning practice with offices in Western Cape, Johannesburg, Tshwane, Eastern Cape and KwaZulu-Natal. Hesta van der Westhuizen is based in Johannesburg.

Please note the above information constitutes generic advice only. For more specific advice pertaining to your particular situation, please contact a certified financial planner.

For more information please visit: www.consolidated.co.za