Protecting your homeloan

Protecting your homeloan should be a key priority in prudent financial planning — but traditional methods may not be the best or the cheapest.

Rhys Dyer, Insurance Director of MortgageSA, says: "Many buyers assume that they must automatically take out life insurance to cover the outstanding bond balance should anything happen to them before their house is paid off.

"But life cover is not always the most appropriate option — many buyers could cover their homeloan risk more effectively with a Mortgage Protection Policy (MPP) because life insurance also covers the risks of general income loss, whereas a MPP covers the specific risk associated with homeloan debt and is matched only to that particular liability."

Dyer says that deciding whether life insurance or MPP is most appropriate is a case of knowing your risk profile and your needs.

"Life insurance requirements are generally calculated based on income replacement requirements, which typically increase over time.

"Bond cover, on the other hand, is taken to cover a specific liability, and is generally a decreasing cover requirement."

Using an MPP policy therefore has the advantage that the premiums remain fixed for the life of the bond. Compare this to a life policy, where premiums increase every year, and it is clear why MPP can be the more appropriate form of cover — if the person wants to cover only their homeloan, and has no additional goals in mind for their beneficiaries.

Policy can be cancelled without penalty
"A further bonus is that MPP premiums are only due when the bond registers, and the policy can be cancelled at any time, without penalty.

"Many clients can also obtain it without a medical. Life cover almost always requires a medical examination to assess the client's risk profile, but to be considered for cover under MPP, a person need only have a bond approved."

Further benefits
Dyer says further benefits of an MPP policy kick in at the cession of the policy.

"In the case of life cover, benefits will be paid directly to the beneficiary of the policy, who must then continue making bond repayments to the bank. With MPP however, the policy is usually paid directly to the bank to cover all outstanding liabilities — meaning less paperwork and admin for the beneficiary.

"Another compelling benefit is that an MPP offers wider benefits which are not usually associated with life insurance, like cover for retrenchment.

Under the MPP policy, the benefits payable under these covers are linked to the monthly home loan repayment, so as interest rates rise, the value of these benefits will also increase — at no additional premium. The cover on the policy thus always matches the liability of the homeloan."

Dyer points out that a MPP may not be suited to all people, but it is an appropriate option for many homebuyers.

"What is most important is that homeowners ensure that they do have adequate protection in place, to cover themselves against unforeseen events which may occur in the future and radically change their financial status."