It can be used as surety

One thing lenders will look at when giving anyone a loan is assessing if you will be able to pay off the loan, even in the event where you die. While you may be planning on living for a long time, your lender still needs to be 100% sure that you can pay the loan back. Having a life insurance policy in place doesn't only prove that you are responsible, but it also gives a thumb’s up to your lenders that you have made a plan to ensure that the loan is paid even in the event of your death.

It protects your loved ones

Purchasing a home is the next chapter in many people's lives. It also means that you would love to house your loved ones in it one day. However, with the debt ratio being so high in South Africa - we currently owe R1.9 trillion in debt, the last thing you want is becoming part of this ratio. Having life insurance can give you peace of mind that your home loan can be paid off, protecting your loved ones from having to shoulder the cost that comes with the paying off of your home should you pass away.

Using your life insurance to cede a home loan

While being able to increase your chances of having your home loan approved by having life insurance, it is also important to understand what it means to cede your life insurance for a home loan.

When you cede your cover, this means that you give the bank or a lender the power to claim the amount that you owe from it. What people tend to overlook is that this could be deducted before your claim is paid out to your loved ones, which decreases the amount that they will receive at the end of it all.

For example:

Pearl is insured for R5 million. She uses it to cede her bond, which is to the value of R2,3 million. She passes on before paying off the remaining amount of R2 million. The bank claims the remaining R2 million from her life cover before her loved ones receive the payout. Instead of receiving the total sum of R5 million they will receive R3 million. If the policy comes with a built-in funeral benefit of R50, 000 this will be taken from the R3 million leaving them with R2 950 000.

What to consider before using your life insurance for a home loan

Carefully considering the effects that ceding a loan will have on your loved ones is important. Speaking to your insurer or a financial provider can help you make an informed decision that will protect the future of your loved ones.

Another factor that you should consider is if you are taking enough life cover that will protect the future of your loved ones. The common mistake is to focus on the premiums that are being paid, but at the end of the day, it is vital to consider the features that come with your life cover. You could also consider putting other financial features in place such as cutting back on expenses that can help you reduce the amount you owe on your bond.