Eliminate debt on death or disability

Personal loans, bridging loans, home loans, mortgages, credit cards, lines of credit, hire-purchase, interest-free purchases; it doesn't matter what you call it, it's debt and most of us have plenty of it. It has paid for our homes and often our cars, clothes, furniture, and children's education. It enables us to live a lifestyle we wouldn't be able to afford simply on cash.

In almost all cases when borrowing money, the lender will require a personal guarantee or some other form of security for the loan. Unfortunately, when we die, the debts do not die with us.

A common clause in mortgage (or loan) documents is for the loan to become immediately repayable upon the death or disability of the borrower. Generally, we simply don't have the necessary amount of money to meet this repayment immediately, and could be forced to sell the asset to raise funds to repay the lender. When this asset is the family home, this leaves dependants in the unenviable position of either trying to re-finance the loan or downgrading their residence.

A cost-effective solution is to use life insurance to provide a payment upon death, permanent disablement or occurrence of a serious medical condition. This can then be used to repay the loan.

How does the strategy work?

The first step is to calculate your total debts. Don't be surprised if this is a large number - it's better to know this now rather than later. This is a good starting point to identify the level of insurance cover required to clear your debts.

The next step is to determine (in conjunction with your financial adviser) for what 'events' you wish to be covered. For this strategy, the most common form of insurance is for death; however you may also want to be covered in the event of total and permanent disability and/or occurrence of serious medical conditions.

The Benefits

• Clearing your debts means the asset is debt-free and the full value can be passed on to your dependants.

• The cost of implementing a protection strategy is only a fraction of what you and your family may otherwise stand to lose.