Although home owners may be hard-stretched in the current economic climate to afford what they may think of as yet ‘another insurance policy’, there are valid reasons to consider a Bond Protector Policy.
The home loan insurance environment is often misunderstood, and worse, not budgeted for in terms of monthly affordability. In some cases, particularly for first-time home purchasers, it’s an unknown and it’s not until a purchase agreement is well underway that there is a sudden mad scramble to rework finances because the home loan itself requires a form of insurance as security.
Craig Young, Managing Executive: Insurance for the ooba Group explains that essentially there are two different types of home loan insurances; a Bond Protector and a Buildings Protector. “The Bond Protector is a long-term insurance credit life policy, meaning that it covers a specific debt, in this case, the home loan. This policy is usually ceded to the financial institution where the bond resides, and unlike the more traditional Life Cover insurance, is designed specifically to pay the outstanding bond in the event of death, dread disease, loss-of-income, or permanent disability of the bond-holder.
Buildings Protector policy
“A Buildings Protector policy covers the building, in other words, those immovable structures, inclusive of outbuildings, and their fixtures, fittings and improvements. This type of policy is also known as homeowners’ insurance and is compulsory for obvious reasons, such as if the home is destroyed by fire, or by a force of nature. It is not just to protect the home loan financer either, the homeowner is protected should such a catastrophe occur,” says Young.
Bond Protector knowledge
Young says that when looking at home loan protector insurance, it is important to note the extent of the cover. It’s not a matter of accepting the first policy offered, and a homeowner should not be pushed into such a deal without doing their homework or at least having a basic understanding of the cover. There are a number of questions that should be asked of all such policy providers to allow the homeowner to compare apples with apples:
For example, Young highly recommends the following be determined:
- How long is the term of accidental death cover?
- How flexible is the cover being offered, can it be tailor-made to suit your individual requirements?
- What annual premium increases can you expect?
- Is there loss-of-income protection?
- What are the conditions of claiming, be that for temporary or permanent disability, or death?
The most important aspect to consider is whether the policy is well-structured for your purposes, and is understandable. Many of us either forget to read the fine print or just can’t be bothered. You have every right to ask the insurer to go through the fine print with you, to ensure that you understand your obligations, and theirs. And, as with any insurance, it is crucial that you tackle this from what you consider a worst-case scenario, which can differ from individual to individual.
The premium is likely the most important consideration. Young says that there is no standard premium applicable on the ooba product, which may differ from similar in the market. “It is based on socio-economic class variables, such as age, smoking status, income, gender and so on. The premium itself should ideally be structured on an annually decreasing cover basis, meaning that the premium should not increase but remain the same for the life of the policy. Simultaneously the sum being insured also reduces steadily over the duration of the policy, which is aligned to the amount owing on the bond.”
This is as it should be, and something that car insurers were criticized for not doing some years ago. When a claim was implemented, people were devastated by a pay-out that did not equal or justify the premiums paid. Bond Protection insurance automatically tracks and adjusts fair market values, which provides much relief in the event of a loss, or downgrade, of homeowner income at a time when every cent counts.
Psychologists consider not being able to meet a mortgage repayment as one of the top stress triggers and as Young points out, a loss of income is an unfortunate reality in the current economic environment. “Having a Bond Protector will assist in paying bond instalments for up to, for example in ooba’s case, 12 months. This is also crucial should a household’s main breadwinner pass away.”
Life Cover
It may be that a household has a Life Cover policy, believing that it will provide enough in the event of the death of the main breadwinner. Young says ideally Life Cover should be used to cover essentials such as food, schooling, water, power and insurance premiums, for example, whereas a Bond Protector means that a family need not add to their woes, the stress of making a bond repayment.
“If Life Cover is used to settle a homeowners loan with the financial lender, there may not be sufficient left over to assist with day-to-day living costs. No credible insurance provider wants to see anyone in this situation, which is why I cannot emphasise enough the importance of doing the right research in the market, or finding a company that can undertake it for you,” concludes Young.