Turning a house into a home is both stressful and freeing at the same time. The biggest component is being able to pay off your bond, but what happens when you are unable to?
Did you know that you can use your life cover as surety for your home? However, there are a few things to consider before using your life insurance as surety for your home.
What is surety?
When applying for a home loan, you will have to provide surety through your finances or an asset that can be used to make sure that your home loan will be paid. Having life insurance is one of the ways you can assure your financier that your home loan will be paid off, making you less of a risk.
The pros of life insurance as surety
Owning a home is one of the biggest steps that anyone can take. Making sure that it is paid off or that in the event of your death, your loved ones won't be left with a hefty bill to take care of is crucial. Your life cover can make sure that your home and your loved ones are taken care of.
It also increases your chances of being approved. Ceding your life cover can affect your life insurance payout but having peace of mind knowing that you have built a financial safety net that can protect your property along with your loved ones is priceless.
The cons of life insurance as surety
Life insurance is an agreement that you get into with an insurer that in the event of your death or of you becoming terminally ill, a claim will be paid out to your beneficiaries. You cannot convert your life insurance policy into cash to pay off your home loan. It is also crucial to keep in mind that using your cover to be used as surety can affect the overall payout that is made during the claims stage.
John who is insured for R5 million uses his life cover as surety for his bond which will cost him R2,3 million to pay off. He passes on before paying off the remaining amount of R 1 million, but due to his early planning the bank claims the remaining R1 million from his life insurance policy payout.
However, instead of his loved ones receiving the R5 million he is insured for, they will receive R4 million. If the policy comes with a built-in funeral benefit of R50, 000 will be paid out immediately to cover funeral expenses, leaving a balance of R3 950 000 for your loved ones.
Keep in mind that your policy will only pay out if your payments are up to date. Not doing so can cause your cover to lapse, resulting in it being cancelled. The last thing anyone wants is having years of work being cancelled because of a few missed payments.