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WHEN applying for a bond, the institution initiating the home loan will normally insist on some life insurance to safeguard them against premature death.
They cannot insist that you do it with them, but they are entitled to insist to have protection.
Many different ways of insuring these bonds have come about and, in most instances, to the detriment of bondholders.
In my opinion there is only one type of viable cover. This is the type that can guarantee cover on the outstanding balance of your bond at the cheapest premium possible.
Brokers may try to sell you endowment policies, but these market-related policies have not managed to keep up with soaring costs.
Endowment policies have achieved returns well below 10percent for the past ten years while bonds have varied between 8,25 and 15,5percent rates of interest.
Term assurance offers homeowners the simplest package at approximately a third of the price of most other policies.
Either level or reducing term can be bought for a minimum contribution and should the life assured die before the term of the bond's expiry, the amount paid should cover the bond.
With decreasing term, the bondholder needs to be careful to ensure that the sum assured accurately mirrors the fluctuations of the bond.
In many cases, a bond is probably the largest debt that will be incurred in a lifetime and payments are often supported by both husband and wife.
The loss of either income in the event of death would therefore create greater risk of debt. For this reason, I recommend that the term assurance be taken on the lives of both spouses. I also strongly advise against adding an investment increment on to your mortgage protection policy.
Term assurance is far cheaper than a whole life policy or an endowment and the money saved can be invested elsewhere, such as unit trusts, to achieve better returns.
There is one danger, however, in buying term assurance that restricts your future potential for growth. Currently, most first time homeowners are Dinky's (Double income, no kids yet).
Circumstances change and the need to move into bigger, more expensive homes arises and the cover required because of an increased bond would be greater.
As money does not buy insurance, your health does. I suggest a guaranteed insurability option be taken allowing future cover without medicals. You can also add disability, dreaded disease or retrenchment riders to the policy.
I've always advised clients to pay their bond off as quickly as they can.
To get the cover that best suits your needs, you need to:
l Find a reputable, independent financial advisor;
l Look at a variety of products;
l A competent broker needs to maintain regular communication with clients and trouble- shoot where necessary;
l Ask your broker for a comparative table before you buy life assurance;
l The bank granting the bond will try and sell this to you, but first investigate all options;
l Always read the fine print. Ask your broker to explain terms and conditions;
l Disclose your medical conditions. This may increase your premiums, but it won't jeopardise a payout upon death.
l The writer is a director of Bryan Hirsch Colley and Associates. Helpline 011-880-4888.