Insurance policies

When a buyer is granted a bond to buy a home he will be certain to receive telephone calls from insurance brokers urging him to take out sufficient insurance to cover the full cost of the home in the event of its being destroyed by fire, storm or any other cause. This is known in insurance circles as an HOC (Home Owners Comprehensive) policy.

Discussing home insurance recently, Rob Lawrence, National Manager for Rawson Finance, the fast growing bond origination company, said,

“Because the bank has a vested financial interest in the property that is the underlying security for its mortgage bond, a bank has the legal right to and will always insist that such an insurance policy is taken out so as to protect its asset in the event of the home being damaged – which does happen more often than most people realise. Often the bank will try to persuade the new owner to do this through them - but he has the right to shop around to try and find a similar policy at a better rate, if that is possible. This, incidentally, is fairly frequently achieved.”

“However, if a non-bank policy is taken out, bondholders should be careful to ensure that it meets the criteria specified by the bank. While price is important, so too are the conditions and the coverage given.

A second series of phone calls can then be expected from brokers to the new owner, said Lawrence – and these will relate to insurance known as the HMP Policy (Home Mortgage Protection) policy. The brokers here will be trying to sell the new owner a life insurance policy large enough to cover the full sum still outstanding on the bond should the owner die.

“This type of policy is not, however, compulsory,” said Lawrence, “but neglecting to take it can lead to serious problems.”

Certain homeowners, said Lawrence, will not accept the second policy as it is seen as a grudge purchase - and the banks in this case have no right to insist that they do so, unless they have made it a condition of the bond grant.

That, however, he said, is a very big mistake.

“Any review of the home mortgage bonds in South Africa,” said Lawrence, “will show that time and again the surviving spouse, children or other dependants on the homeowner have after his death found themselves without sufficient funds to continue to service the bond. This inevitably means that before long the home will have to be sold – or will be repossessed by the bank, leaving the dependants without a home.”

No matter how difficult it is to meet the insurance payments, said Lawrence, the homebuyer should take out a life policy to cover every rand still owing on the bond. Not to do so, he said, is almost criminally negligent. Unless the owner has ample assets, it is bound to cause distress to the surviving family members.

Lawrence added that the cost of this life insurance can be kept down if it taken out on a no-benefits payback basis, i.e. if it is paid out only in the event of the policy holder dying.

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