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
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
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
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
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.
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