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How to save on home loan insurance

Jun 14, 2021

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.

How to save on home loan insuranceBuying 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.

Comparing the cost of home loan insurance

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.

6 Comments

  1. It is beneficial to have a home loan insurance cover. However I find it strange when the bank is not flexible with the insurance cover. I was required to have a retrenchment benefit, and the nature of my work doesn’t cater for retrenchment. I eventually did not take it as the consultants could not understand my situation. It will help if the bank can strive to understand and accommodate clients’ different positions.

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  2. Thanks Maya for this insightful article. Can one cancel the existing cover with the bank if you have life , disability and retrenchment cover?

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    • Yes but you will have to cede over the policy. Make sure you have enough benefits on your life policy to cover any other debts/dependents as well as your mortgage

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Maya Fisher-French author of Money Questions Answered

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