When you buy a new home, the bank will usually insist that you obtain a home owners’ insurance (HOC) policy to provide for the repair or replacement of the property in the event that it is damaged or destroyed by fire, flood, high wind, earthquake or another disaster.
“Such policies often also provide insurance against less serious damage resulting from burst geysers, falling trees, and collapsing garden walls and they do provide home buyers with the peace of mind that they will not end up having to pay off a home loan on a property that has become unlivable, or have to pay for it to be repaired or rebuilt,” says Gerhard Kotzé, MD of the RealNet estate agency group.
“However, most lenders will be less insistent that you take out life insurance to cover the outstanding balance of your home loan and pay it off in the event of your death. But this cover, usually referred to as bond insurance, can make all the difference to your family at a difficult time by enabling them to stay on in a home that is fully paid off, and you should thus consider it very seriously.”
In addition, he says, you should think about whether you just want credit life insurance for the bond or whether you should take an additional normal life insurance policy specifically for this purpose.
“If you decide on the former, also called decreasing-term life insurance, the coverage decreases monthly along with the outstanding balance of your home loan, which means that once you’ve paid off the loan, the policy will lapse and there will be no payout.
“But if you take out an ordinary life insurance policy, you can specify a fixed amount that matches or exceeds the amount of your home loan, and that will still be paid out to your beneficiaries in the event of your death – even if your home has been paid off in the meanwhile.”
The benefits of this type of insurance, notes Kotzé, are that the payout amount does not decrease in line with your home loan balance, and that your heirs can use any money that is left after the bond has been settled for whatever else they may need, such as school or college fees, medical costs or even just to cover the costs of some unpaid leave from work.
“It is thus one of the best legacies you can leave as a homeowner, and relatively inexpensive to create. We recommend it to all our buyers.”