Nelville Melville, the Banking Adjudicator, has called on banks to conduct a comprehensive audit of all their home loans to ensure that homeowners have adequate life assurance.
The failure to take out cover, or allowing cover to lapse, is causing homeowners emotional turmoil and hardship, Melville says.
Many banks insist that clients, particularly those at the lower end of the market, either cede existing life policies to the bank, or take out new policies to cover the outstanding amount of their home loans.
However, several cases have come to the Adjudicator's attention where, following the death of a breadwinner, it has been found that no life assurance was taken out, creating an intolerable burden for the grieving family.
"Women and young children often bear the brunt of this financial oversight," Melville says. "Many live under the misconception that a policy was taken out at the same time the bond was registered, only to discover on the death of their loved one that the policy was never issued."
Sometimes a policy is issued, but then lapses because the premiums are not paid. The problem is largely a result of poor communication between a bank and its clients.
What the banks should do:
- A bank should highlight any reference to insurance on every piece of mortgage-related correspondence that it sends out. Melville suggests that a "homeowner's insurance declaration" would confirm whether or not cover is provided, and if so, through which company, the property's replacement value, and the premium paid. This information should alert banks and clients to possible errors.
- Many clients are confused about the difference between life assurance and homeowner's cover, which covers the structure of the dwelling. Banks must ensure that all communication to clients about insurance clearly indicates whether life assurance or homeowner's cover is being referred to.
- Bank employees responsible for home loans should be trained to ensure that life assurance is, in fact, in place and that clients clearly understand who has to pay the premiums and how they are to be paid.
- Banks should ensure that policy documents are sent to clients, and, using bold type, draw clients' attention to provisions relating to insurance. Particular care should be taken to spell out what must happen in order for the life cover to continue once the home loan is repaid in full.
- Where assurance is not required, a bank should ask its clients to "cancel" a blank assurance proposal and write the words "not required" across it. The client's signature should appear on the document. This safeguard must be kept on file should a dispute arise at a later stage.
- Banks should inform clients in writing that they have insurance.
What homeowners should do
You must understand what type of insurance is required and what arrangements are necessary to institute a policy. It is essential that you pay the premiums if you want to enjoy the protection offered by the insurance policy. You must also:
- Ensure that you are provided with a copy of the policy. If not you do not receive it, ask in writing for your bank to send you a copy.
- If the bank allows you to take out a policy with an insurer of your choice, make sure that you get the same cover as you would from a bank-appointed insurer, and that the exclusion clauses are not more onerous;
- If the bank requires you to obtain or cede life cover, you must be provided, in writing, with reasons why this is required, and be informed of the choices available to you.
- If you fall behind in paying your instalments, check that your insurance policies have not lapsed, even if you have brought your payments up-to-date;
- When your bank sends you a notice of intention to increase the premiums to cover escalating replacement costs, let the bank know if you are dissatisfied with the increase.
- When you finally pay off your bond, make sure there are no misunderstandings as to whether or not the property will continue to be insured.