The case for protecting homeownership with mandated life insurance

22 May, 2023

The New Zealand banking sector has undergone significant changes over the past five years with the sale of its life insurance companies. The separation of banks and their insurance companies has resulted in less pressure on bank customers to purchase insurance. However, a possible unintended consequence is that fewer people are considering life insurance in conjunction with their mortgage.

Currently, many homeowners in New Zealand are at risk of losing their homes due to unexpected events such as a borrower's death without adequate life insurance coverage. While the onus may be on individuals to take out life insurance, it is crucial to recognise the role that banks could and should play in ensuring the wellbeing of their customers.

In this blog, we will explore why banks should be responsible for ensuring adequate cover for their customers in the event of death and why mandated life insurance in homeownership should be considered. We will examine the potential consequences of not having life insurance and explore how mandated life insurance could mitigate these risks and provide greater financial stability to borrowers.

The history of banks and life insurance

 In 2015, New Zealand banks began regularly featuring in media stories as pressuring consumers into buying insurance products they didn't want or need. This bad publicity continued for several years, resulting in the Financial Markets Authority and Reserve Bank Te PÅ«tea Matua launching a joint Bank Conduct and Culture Review in 2018. At this time, all four of the main Australian banks owned life insurance companies.

From 2017, all these major banks began to divest themselves of their insurance arms, with ASB selling to AIA, ANZ to Cigna, BNZ to Partners Life and Westpac to Fidelity Life. Whilst most banks have entered long-term distribution deals with these companies, their staff are no longer financially motivated to sell the products as they don't make significant profits from the sales and are no longer financially invested in ensuring adequate insurance coverage for borrowers. Whilst it may seem counterintuitive as there is the potential for banks to lose money in mortgagee sales, property is such a sound investment, and mortgage lending so regulated, this is unlikely.

Why consumers should be concerned about banks selling their insurance companies

The separation of banks and insurance may seem like good news to consumers who no longer feel pressured by banks to buy insurance. However, in a time when many households are facing financial hardship, we must consider the potential consequences of not having life insurance and the role banks should play in ensuring their customer's financial well-being.

In March 2023, Centrix reported that 18,400 people were behind in their mortgage repayments, with the figures rising monthly. We know over 50% of fixed-term mortgages are due to be refixed over the next 12 months at interest rates over double those seen last year. It is logical to assume a rising number of people will struggle to pay their mortgage throughout 2023 and beyond, and that's assuming nothing goes wrong.

While banks can and will work with individuals on short-term solutions such as interest-only loans or repayment holidays, if one or both family income earners pass away, this is unlikely to be an option.

What happens to your mortgage if you pass away

In New Zealand, if a property is jointly owned, the mortgage obligations transfer in whole to the surviving borrower. Therefore, if one person dies, the other is entirely responsible for paying the mortgage. Conversely, if there is only one owner or both owners die, the mortgage responsibility does not pass to anyone. The estate must cover the costs of the borrowing before beneficiaries receive any dividends.

In plain English, this means that if a person who owns a property dies, either someone needs to pay the mortgage or the family will lose the home. They can also lose any profits from selling the house, especially during a property downturn as we are currently experiencing.

It seems negligent that whilst banks are legally required to lend responsibly, ensuring the borrower(s) are able to service the loan and that the house itself is insured, they abdicate responsibility for ensuring that the loan will be able to be serviced in the event of the borrower(s) death. Surely the financial well-being of the family is something that should be protected.

What is likely to happen to your home if you pass away without life insurance

Let us consider the likely outcome of a borrower passing away without life insurance to cover their mortgage. The latest CoreLogic housing affordability report shows that the percentage of income spent on a mortgage is 53% within New Zealand. These figures mean that most households with two people servicing a mortgage will not be able to continue making repayments with only one income.

Unless households have insurance in place, they are likely to have to sell the home to repay the mortgage and are unlikely to be able to replace it.

A family's home is often their most significant asset and home ownership is the single most important factor affecting people's perceived financial wellness. The loss of this financial security and your partner would be a crushing blow.

But what if you bought your home during a high and then must sell in a low? It could mean the surviving partner not only no longer owns a home but they also owe money on the house they no longer have, potentially resulting in financial ruin and bankruptcy.

And what if a single borrower dies? Then the executor must sell the estate's assets to cover the mortgage before distributing any funds to the beneficiaries. What if this was to happen during a low and the property took an extended period to sell (whilst the mortgage increases)? Or even worse, it doesn't sell at all? The financial worth of a person's single biggest asset could be cannibalised to the point where it is insignificant or even worthless, leaving nothing for the people they love.

What is the solution?

One point of view is that we are all responsible for ensuring the well-being of our loved ones and should all have life insurance in place. But the same argument could be used to justify having no limit on borrowing (which led to the Global Financial Crisis of 2008), as we should all know how much we can afford to borrow. So why is ensuring people are protected in the event of a loved one's death any different? 

Does financial security and protection only matter when it affects the entire economy?

A potential solution is mandating life insurance for people who purchase a home. This would align with other legislated responsible lending practices and ensure borrowers are protected. There is the potential for every mortgage sold to come with life insurance to the loan's value, which would automatically decrease as the loan was paid off. Whilst there would be a slight increase to the mortgage repayments to cover this, it is clear that the benefits would far outweigh the cost.

Banks have once more come under fire in the media over the past twelve months, returning record profits in a poor economic climate that teeters on a recession. As they make these profits from the money they lend, they should, at the very least, have a moral responsibility to 'do no harm' to their customers. By ensuring borrowers have life insurance in place, banks can meet their obligations to their customers, improve their reputations, and foster greater trust in the banking sector.

Whilst the sale of life insurance companies by New Zealand banks may have relieved customers from feeling pressured to buy insurance, the lack of insurance coverage for mortgage borrowers has led to financial instability for many households.

Is this a position we should go forward with in this uncertain economy?  

AMS provides the solution

For over 30 years, AMS has provided market-leading bankassurance products to the life insurance industry, supporting the management of all products for their lifetime. 

Contact us today to discover how our product can change the way you do business, or download a pdf of our AMS Insurance Policy Management Overview.