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Life Assurance
Tuesday, February 1, 2005
Homely advice

Protecting your home loan should be a key priority in prudent financial planning - but traditional methods may not be the best or the cheapest.
Says Rhys Dyer, Insurance Director of MortgageSA, “Many buyers assume they must automatically take out life assurance to cover the outstanding bond balance should anything happen to them before their house is paid off.
“But life cover is not always the most appropriate option. Many buyers could cover their home loan risk more effectively with a Mortgage Protection Policy (MPP), otherwise termed ‘bond cover’.”
Mr Dyer says that deciding whether life assurance or MPP is most appropriate, is a case of knowing your risk profile and your needs. “Life cover requirements are generally based on income replacement requirements, which typically increase over time. Bond cover, on the other hand, is taken to protect against a specific liability, and is generally a decreasing requirement.”
Using an MPP policy therefore has the advantage that the premiums remain fixed for the life of the bond, whereas under a life policy the premiums increase every year.
“A further advantage is that MPP premiums are only due when the bond registers, and the policy can be cancelled at any time, without penalty. Many clients can obtain it without a medical. Life cover almost always requires a medical examination.
“In the case of life cover, benefits will be paid directly to the beneficiary of the policy, who must then continue making bond repayments to the bank. With MPP however, the policy is usually paid directly to the bank to cover all outstanding liabilities, meaning less paperwork and administration costs for the beneficiary.
“Another compelling benefit is that the MPP offers wider benefits, which are not usually associated with life assurance like cover.
MPP includes cover for retrenchment. Benefits are linked to the monthly home loan repayment, so as interest rates rise, the value of these benefits will also rise, at no additional premium. The cover on the policy thus always matches the liability of the home loan.”
The MPP product may not be suited to all people, but MortgageSA believes it is an appropriate option for many homebuyers. However, one should not overlook the importance of a good debt management strategy, and this is more important than worrying about any form of linked life cover.

Copyright © Insurance Times and Investments® Vol:18.1 1st February, 2005
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