You have finally saved for the deposit of your dream home. You have spotted the house you want to buy. You have all the required documents. You head to the bank and you know you qualify for a home loan. But the consultant asks if you have life insurance.

Here is why.

“Institutions insist on life insurance when you take out a bond because it is used as collateral in case the bond holder passes on,” says Mbonisi Tshabalala, an articled planner at Chartered Wealth Solutions.

“When a loan is granted, some form of surety is needed in case there is a default on that loan. Life insurance provides that surety,” explained Michael Fortune, a financial advisor from Absa.

Why life insurance?

Tshabalala says life insurance is a convenient way for the lending institution to get its money back since the institution is the only beneficiary of the life policy. The bank does not have to carry the risk of the deceased estate being insolvent. If the bond holder passes on the life policy will pay the lending institution.

What if you don’t have life insurance?

Fortune says that there is an unwritten rule that clients must have a life insurance policy when applying for a home loan. However, the banks still accept other assets as collateral.

“You can still cede your property, but there is a legal process that must be followed. Life insurance is the easiest route,” he said.

How does this benefit you?

Fortune says that ceding life insurance does not only benefit the bank, but also the client.

“Look at it this way –  the bank does not have to repossess the house, so your assets are safe,” said Fortune. “If you have three properties and put all those as surety, what happens to the family? “

Not only is it the easiest but also the least expensive way to protect your bond.