Distinguish between different types of home insurance!

6/9/2008 2:20:41 PM

It is has come to my attention that there is some confusion when it comes to the different types of insurance with regards to owning your own home. It is important to distinguish between the different types of insurance and in this regard I want to address the following: Home owners insurance, Insurance on the content of your home and Life cover for your outstanding bond.

Home owner insurance

This kind of insurance is often not that visible. If you take out a bond most banks will insist on this kind of insurance. What it entails is insuring against the adverse outcome of events like a fire burning down the house or storm damage etcetera. This kind of insurance has nothing to do with the content of your house and does not apply to robberies or even the loss of furniture and appliances through the above mentioned events.

Home owner insurance covers the structure i.e the bricks and mortar, roof, geyser and other fixtures and fittings. It is important to note that this is a separate policy and it should not be assumed that this is included in the policy covering your household content.

Very often people also forget to update this kind of insurance. If you bought a property a few years ago it may be under insured. You may have bought the property for R500 000 and due to the increases in property values over the last number of years you property is now worth R1million, or the cost of replacing it is worth R1 million or more. Then the insured value should be increased to the replacement value. The reason is that if the property should for instance burn down the insurance company will only pay out the insured value which could mean that you receive R500 000 and cannot rebuild the property for that amount. You should actually revalue your property annually and adjust the cover accordingly.

Very often people also to tend laps their homeowner insurance policy when they paid off their bond. Just because your bond is paid off does not mean that you don’t have the risk of losing your property and in many cases your biggest investment. Make sure you have a policy covering you in cases of damage to the structure of your property.

By the way according to the National Credit Act you are not obliged to obtain your homeowner’s insurance from the bank that provided your home loan. Any insurance company can issue you such a policy.

Covering the contents of your home

The second type of insurance when it comes to our homes is a policy covering the contents. This type of insurance is more familiar to most of us so I don’t want to go into too much detail here. Most importantly make sure that you update your policy on a regular basis to provide for the impact of inflation on the cost of your household goods namely furniture, Tv’s, Hi-Fi’s, appliances etcetera.

It is always a good idea to keep an inventory of all your goods and in case of items like jewelry obtain valuation certificates. A valuation certificate makes it easier in case of loss since most insurance companies limits the payments to maybe R1000 for these kinds of items unless you can prove that you owned the items claimed. This is where the valuation certificate comes in handy.

Life Cover for your bond

The third type of insurance is life cover for the value of the outstanding bond. If the owner of the house has a bond and dies the bank has a claim against the estate for the value of the outstanding bond. If the estate does not have enough cash to settle the bond the bank can foreclose the property and sell it to settle the outstanding bond leaving the longest living spouse or family destitute.

One can take out life cover to the value of the outstanding bond so that in the event of death an amount equal to the bond is paid out and used to pay of the debt leaving the family with a property which is fully paid.

One way is to take out term insurance. Lets say a person takes out a bond which is paid over a 20 year term. This client can then take out insurance for a fixed amount and for the 20 year term at which time the life cover will expire but the the bond will then be paid off and life cover for this purpose is no longer required. This type of insurance is usually the cheaper option although it may have some other drawbacks. I suggest you discuss this with your financial advisor.

Well that’s enough for now. Till next time.