Ever wondered why life insurance is a crucial requirement in the home loan application? We spoke to Victor Gouveia at Absa Life and Nondumiso Ncapai at Absa Home Loans to provide us with the ultimate guide to maximising the opportunities that life insurance can unveil, and the obligations and implications on a policy holder relative to the term of the home loan.
• Nondumiso, why is life insurance required for a home loan?
The granting of credit against a secured asset relies on the ability to understand the risk of customers not being able to service the debt and the property having to be sold. Some property values or locations make it difficult for them to be resold in the market.
In some of these instances, a life insurance policy cession will be required by the bank to ensure the debt will continue to be serviced or even settled should certain life events take place.
A life policy ‘cession’ (‘ceded’) to a credit agreement means on the occurrence of the insured life event, the insurer will first settle the debt obligations before the remaining value of the policy is paid to the listed beneficiary/ies or estate. Absa’s MyHome product requires that a customer take up life insurance or credit protection cover and that the cover remains in place throughout the term of the home loan. It is a condition of the home loan.
If you can settle your home loan account and leave your loved ones an asset that they can call home, why not do so? This is why we encourage Absa customers to include the home loan in their estate planning. The idea of a bereaved family having to sell their home (not out of choice) or being evicted is an undesirable and painful event that should be avoided at all costs. The risk of this is higher at certain income levels as is the potential adverse socio-economic impact.
• Victor, what should credit life insurance cover, relative to the home loan?
The consumer can choose the insurance solution being offered through the credit provider or they can provide a policy from another insurance provider as security.
According to the credit life regulations, a proper credit life insurance policy must provide cover to the client in case of death, permanent disability, temporary disability, or being retrenched and unable to earn an income.
In case of death or permanent disability, the policy will settle the outstanding balance on the home loan account.
Should the client be temporarily disabled or unable to earn an income, the credit life insurance will pay the monthly instalments on the home loan account for a maximum period of 12 months for each claim event.
• How does credit life insurance differ from a normal life insurance policy if the ultimate outcome of both is to cover the home loan?
Credit life insurance is offered on the back of a credit facility that would have been extended to the client i.e. cover on an approved home loan. The minimum benefits available for credit life as required by law are highlighted in the question above. The policy is automatically ceded to the credit provider as security and any benefits payable will be paid directly to the credit provider.
On the other hand, a normal life insurance policy is designed in such a way that the client can chose the benefits (e.g. death, disability, critical illness etc.) that they want from a list on offer as well as the amount of cover they want. The client will need to cede this policy to the credit provider as security against the loan. The credit provider normally request that such a policy should have cover at least some specified benefits for it to be accepted as security against the loan.
• Nondumiso, what are the consequences should life insurance be cancelled while the home loan is still active?
Cancellation of life insurance where it is a condition of loan can have two outcomes; - The credit provider may enforce the condition, in accordance with section 106 of the National Credit Act, by taking up a policy on behalf of the customer. The policy is added to the monthly repayment amount due against the home loan. - The credit provider reserves the right to call up the agreement as the customer is in contravention of the terms and conditions.
Either scenario is not desirable. Should a customer have financial constraints that mean they are unable to afford the home loan repayment as well as the life insurance premium, it is important that they reach out to the bank to understand what arrangements can be made.
• If there are no estate inheritors, is life insurance still required?
If the home loan account holder does not have any dependents, life insurance is likely to still be required if the loan agreement applies to a specific product offering or risk pre-determined segment.
• Victor, how does a life-threatening or chronic illness impact on life insurance for the purposes of a home loan application?
In order to determine insurance premiums, life insurance companies use a process called underwriting and each insurance provider has its own criteria for life insurance cover eligibility.
In general, credit life insurance products cover all clients who have a credit facility for which the credit life policy was designed to cover.
Absa offers various life insurance solutions with varying levels of underwriting, each intended for consumers with different backgrounds, across different channels of distribution.
• Nondumiso, What is the process when an estate owner dies with an outstanding amount on the home loan?
This can be quite an extensive and detailed process that runs through a few options with the bank interacting with the estate through the executor of the estate. Ideally there is enough money to settle the outstanding balance from the estate; unfortunately, this is rarely the case in our experience as estate planning is not commonly undertaken by clients. This presents a number of challenges for the remaining dependents. In some instances, the bank must resort to legal action to pursue the settlement of the debt which include the sale of the property.
When a claim is submitted to the estate these are possible outcomes:
- Settlement of debt; there is enough money to settle the outstanding balance from the estate.
- Substitution of debt (or); where the surviving party of a joint bond takes the remaining debt into their name (subject to risk and affordability assessment).
- Sale of the property; by the executor directly or through the assistance of Absa’s HelpUSell programme.
• What are life insurance payout settlement obligations relative to the outstanding home loan debt?
Payout of the life insurance differs based on whether it is ceded to any credit agreement or not. If the life insurance is ceded to a credit agreement, it will first be used to settle the outstanding balance of the credit agreement and the remaining balance is payable to the listed beneficiary/ies or estate as appropriate. If the life insurance policy is not ceded, the payout is directly to the beneficiaries or estate. If no beneficiaries are listed, the payout amount accrues to the estate and the funds will be used as at the discretion of the executor.
Once the payout is made to the listed beneficiary/ies, they do not have an obligation to use the funds to settle the outstanding balance of the home loan. The money is theirs to use at their discretion. It then rests on the estate to settle the outstanding balance of the home loan. This may mean the property needs to be sold if no person/s from the remaining beneficiaries or dependents are able to service the home loan repayments.
The challenge often exists in the urgent need to settle the outstanding balance with the bank and the time it takes to find a buyer offering fair market value for the property. In such cases, the property may often be sold for below market value.
• Victor, does Absa offer life insurance along with a home loan application?
Absa offers a range of life insurance solutions tailored to its customers’ diverse financial needs. The customers are offered varied insurance policy options across multiple channels during the application process for home loans. Speak to an Absa home loan consultant in branch or call 0860 227 253.