When applying for a home loan, the bank will insist that you take out home loan insurance to cover the repayments in the event of death, disability, or retrenchment. Evelyn Doubell, Private Wealth Manager at NFB Wealth Management finds that it’s usually cheaper to take out your own home loan insurance, rather than accepting the cover offered by your bank.
Buying your first home is both an exciting and daunting experience. Dealing with estate agents, banks and lawyers during the bond approval and transfer process can be nerve-wracking, and you’ll probably be faced with more paperwork and information than you can conceivably process.
Most people are so anxious at this stage that they just sign where they are told to sign. It’s just easier to agree to the insurance cover that the bank offers along with the home loan.
However, there is a good chance that you will be paying more than you should for this home loan insurance.
I have a young client, Mark, who recently purchased his first home. When he looked at his bond statement, he was perplexed as to why his loan amount was not decreasing.
On closer inspection, Mark discovered that he has life and disability cover on the loan and that this premium was part of his loan repayment to the bank.
This premium was a budget-straining R1 017.99, a hefty sum for a young man aged 23 who has only recently started to earn an income.
Comparing the cost of cover
I researched and prepared a couple of quotations, comparing various insurers’ cover to the bank’s cover, and discovered that the premiums of Insurer A were about two-thirds cheaper than the bank’s premiums, and those of Insurer B.
Not only is the cover more appropriate for Mark’s needs, it is also much more affordable and flexible.
The problem with the bank’s policy is that it only covers the outstanding loan amount. Should Mark die or become disabled, the life cover or the income replacement cover is paid straight to the bank to cover his bond. As the bond decreases, so the cover amount decreases. The premium, however, does not decrease; it may even increase, as it is not guaranteed.
With the bank’s policy, Mark is not covered for his living expenses should he be unable to work. Of course, it is great that his bond will be paid, but what about his other expenses? How will he afford to carry on living?
The bank’s contract wording states that Mark had 30 days to cancel the policy and take up cover elsewhere, which he must then cede to the bank. Unfortunately, he did not realise this, as this was his first experience purchasing a home.
Trying to cancel the cover with the bank has been an uphill battle even though he has implemented alternate cover which is much more comprehensive, and it covers not only the bank but also himself.
Although the new policy has been ceded to the bank – which gladly signed and accepted the cover – the bank has refused to cancel Mark’s cover because he does not have retrenchment cover. Mark works in a family-owned business, so retrenchment cover is moot.
A lesson in the story
While many bank clients report a similar experience to Mark’s, to be fair, not all banks have the same policy. Nevertheless, there is a lesson in this story.
When buying a home or car and financing a loan, you will be required to sign numerous documents. Read the documents, ask questions, know your rights and get information.
Don’t be pressured into taking the bank’s cover which is a much more expensive option as you don’t go through the medical underwriting process, which means your premiums are based on the worst-case scenario.
Take your time and don’t rush. Make sure that you are in control of the relationship with your bank and are equipped with the right information.
Consult your financial adviser when you have big decisions to make such as buying a home to ensure you are not inadvertently signing up for more costly options.
This post was based on a press release issued on behalf of NFB Wealth Management.