How to choose a life insurance policy for your home loan

There are many things first-time buyers will learn when purchasing their first home, one of which is that they will need a life insurance policy of some kind to qualify for a home loan. Knowing which policy they need will depend on the bank through which they have acquired their home finance.  

“Life cover is the assurance most financial institutions require in order to grant you a home loan. As unpleasant as it might sound, the institutions need to be sure that the loan amount will be repaid even in the unfortunate event of your death during your lending term. For those who are the primary income providers in their household, it also ensures that your loved ones will be provided for in the event that you are no longer around to support them,” explains Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa.

According to Goslett, each bank has its own lending requirements when it comes to life insurance policies, so buyers will need to do their homework with each financial institution carefully before deciding which policy to sign up for. “To save yourself some trouble, work through SA’s leading bond originator, BetterBond, who can advise you about the various prerequisites involved when applying for a home loan. That way, they can provide you with pre-approval on your home loan so that you know exactly what you qualify for before you begin your house hunting process,” he suggests.

Can you use your own life insurance policy?

Many first-time buyers assume they have to accept the life insurance policy offered by the bank that approves their home loan. However, this is not always the case.

Many lenders allow borrowers to use an existing life insurance policy or purchase cover from another insurer, provided the policy meets the bank's minimum requirements and is ceded to the lender where necessary. Because every bank has different requirements, it's worth comparing both insurance premiums and policy benefits before making a decision.

Working with a bond originator such as MyProperty Home Loans can help simplify this process by explaining each lender's insurance requirements alongside your home loan options.

Understanding the different types of cover

Life insurance is only one of several policies that may be required when applying for a home loan.

Depending on the lender, you may also be asked to take out disability cover, which helps repay your home loan if you're permanently unable to work, retrenchment cover that provides temporary assistance if you lose your job, or dread disease cover, which pays out if you're diagnosed with a serious illness covered by the policy.

It's important to understand exactly what your lender requires before signing any insurance agreement.

What affects the cost of life insurance?

The cost of life cover differs from person to person. Insurers typically consider factors such as your age, overall health, whether you smoke, your occupation, the amount of cover required and the length of your home loan term.

For younger buyers in good health, premiums are generally lower, which is why taking out cover earlier can often be more affordable than waiting until later in life.

What if you already have life insurance?

If you already have life insurance through your employer or a private insurer, you may not need to take out a completely new policy.

Many banks will accept an existing policy provided it offers sufficient cover and complies with their lending requirements. In these cases, the policy may simply be ceded to the lender for the duration of the home loan.

This is another reason why it's worthwhile discussing your options with a bond originator before accepting the bank's default insurance offering.

Buying your first home involves far more than simply qualifying for a bond. Understanding your lender's insurance requirements is an important part of protecting both your investment and your family's financial future. By comparing insurance options, understanding the cover your bank requires and working with a trusted bond originator before you apply, you can make informed decisions and avoid unnecessary costs. With the right preparation, you'll be well positioned to secure both the right home loan and the protection that comes with it.