Life is what happens when you make other plans and even the biggest optimist must contend that unexpected life-changing events are bound to happen. Buying life insurance does not mean an optimist now becomes a pessimist, just that a little bit of realism coming into play as you make provision for your future and ensure that your financial responsibilities are well taken care of when you ‘shuffle off this mortal coil’.
Term insurance: death benefit without the high premiums
Term life insurance is the original form of life insurance. Term life insurance products are not very complicated to understand, in contrast to some new generation life insurance products that require quite an in-depth understanding and explanation of concepts such as risk management, life stage, return on investment and so on.
As term life insurance is still insurance, consulting a qualified financial adviser is the first step before you consider taking out any insurance product, including term life insurance. As financial advisers selling these and other life insurance products are earning commission (and therefore making money) out of selling products to you, it will be valuable for you to do some upfront research around the companies that sell such products, so as to distinguish a financial adviser with ulterior motives from one whose advice is sincere and aimed at matching your needs and means with a financial product. Fortunately for South Africans, regulations apply and financial advisers have to be registered as such before they may give advice.
Even if term life insurance is only for a set period of time, you want to make sure that the financial services company that supports such and other financial products will still be around when your relationship with them ends. Stability and a good reputation are important aspects to consider before parting with your money to buy any form of life insurance.
All advice provided in this article is for information purposes only and is intended to provide you with the facts of what term insurance is to further your understanding of these products. It is not intended as financial advice prompting you to choose one product over another. This, as alluded to above, is best done by a qualified financial adviser.
What is term life insurance really?
Simply put, term life insurance is the most inexpensive way to purchase a significant death benefit on a coverage amount per premium. After the period expires, cover at the previous premium can no longer be guaranteed and the consumer has a choice to either forego the cover or to obtain additional coverage; this will attract a different premium and different conditions will apply.
The prime reason for buying term life insurance is to provide cover for financial responsibilities for the insured or his/her beneficiaries. Examples of such responsibilities include debt, care for dependants, tertiary education (for dependants), funeral costs or a mortgage (home loan). A consumer that is fairly close to retirement may buy a term life insurance policy with a term that expires close to his/her date or age of retirement. Such a decision is based on the assumption that by the time he/she retires, he/she would have accrued sufficient funds as part of his/her retirement savings to provide financial security for the claims.
Other than paying out a lump sum to your chosen beneficiaries when you die, term life insurance products do not have any other benefit as they are not linked to an investment option. It is important to review your beneficiaries regularly and to inform your beneficiaries that they have been nominated as well as where your policy is held, so that they know where to and can lodge a claim when you die. Lower premiums apply to term life insurance products, for an individual for the same benefit amount, than permanent insurance products, also because these products are less complicated. It is also relatively easy to cancel a term life insurance policy.
What amount should you provide for as a lump sum? Your family’s monthly expenses in R-amount after your death should be the guiding factor, while ongoing expenses such as mortgage and tertiary education (if not settled by the time you die) should also be included in the calculation. Add these amounts together and then also provide for an amount that you would like to have paid out as a lump sum when you die; this should be the total amount and will determine the premium.
It is critical to buy any form of life insurance while you are still healthy (see below information about renewal periods and proof of insurability) and when your children are still young, consider that the time period – and lump sum amount – of the policy should provide for them until they are finished with their tertiary education and in a position to support themselves financially.
As a result of the lower premiums applicable to term life insurance (depending on the time period that applies), consumers sometimes choose to buy term life insurance rather than permanent life insurance products.
Term life insurance that is renewable, annually
When opting for a term life insurance policy or product, it is important to note if it is a policy with an annual renewal term, which means the policy has to be renewed annually. Other renewal cut-off periods might apply as this varies between providers. A critical factor to consider when purchasing a term life insurance policy with a renewal period or cut-off is the chance that your health might take a turn for the worse.
If it happens, for instance you contract a terminal or critical illness before it is up for renewal, it will not have a detrimental effect on your premiums or the duration of the policy, but it will definitely have a negative impact on your ability to renew. If you are – as a result of contracting a terminal illness – deemed to be ‘uninsurable’, you will not be able to renew your term life insurance policy, even if you are only likely to die after the term of the policy has already expired.
Opt for the premium to stay the same, or convert
Many consumers also opt for another form of term life insurance where the premium paid each year remains the same for the duration of the contract. This is known as level term life insurance. Common terms for these types of policies are 10, 15, 20 and 30 years. While most of these policies are renewable should it be required to extend the insured period, this is not necessarily guaranteed and consumers are advised to check if proof of insurability (i.e. continued good health as explained above) as a condition for renewal is included or if renewal is guaranteed (no proof of insurability is required). Guaranteed renewal does not apply if the insured’s health deteriorates significantly during the insured period and if poor health makes it impossible for the insured to provide proof of insurability.
In many instances, consumers have the option to convert a term life insurance policy into a more permanent type of life insurance product, i.e. Whole Life or Universal Life policy. While this is useful in the case of an insured contracting a terminal illness that would make it impossible for him/her to renew such a policy, some terms and conditions apply and it is advisable to study these with a qualified financial adviser before making a final decision.
Live longer and your premiums are returned – but you pay!
A form of term life insurance offered by many financial services providers, including the likes of Discovery Life and Outsurance and the topic of many television advertisements, gives you a return of premiums paid during the policy term if the consumer or insured outlives the duration of this term life insurance policy. The expiry term for many of these policies is 15 years and after which the majority of your premiums paid up to that time (less any fees and expenses, these are retained by the insurance company) will be returned if the term has expired and you have not died.
It is important to note that this form of term life insurance usually attracts higher premiums than those that apply to a regular level term life insurance policy. The reason for this is that the insurance company uses your premiums as an interest-free loan to make money. This is not the case with a policy where the premium is not returnable. While the same tools are used to calculate the cost of term life insurance than those used for more permanent life insurance products, and both offer an income tax-free death benefit, the term of the term life insurance policy is likely to expire without the insurance company having to pay out any benefits. With permanent life insurance products on the other hand, the insurance company will have to pay out eventually.
Self-insure is good, but requires discipline!
There is a school of thought that maintains that, as most financial requirements are by their very nature only temporary (debt, education of dependants, etc.) and that there is therefore no need to buy expensive permanent life insurance. Supporters of this view are of the opinion that you rather buy a term life insurance policy, then invest the difference in the premium (between the term life insurance and permanent life insurance policy/product). If you are considering this, called self-insurance, as an option, make sure that you are disciplined enough, because if you don’t invest, pay off your debt and help your dependants to become independent, you will definitely need and should consider buying insurance.
When making any financial decision, including buying life insurance, your needs and reasons for considering such a purchase should be the driving force, especially if you are a first-time buyer. In essence, everyone needs some form of life insurance, unless your children are grown up and you are living on your own, you are young, single and responsible only for yourself or if you have the financial means to support family members who remain behind when you pass on. In addition, your current income and lifestyle should determine whether you need life insurance or can wait a while longer to invest in that.
Whether you are considering buying life insurance of any kind or whether you are leaning towards self-insurance, it is critical to note that financial planning does not start when you receive your first salary in your bank account. It starts long before this by reading up about and familiarising yourself with the various financial products that are available and that apply to your life stage. Too few South Africans have a culture of saving money and very few are able to retire comfortably and independently. These two aspects are the driving force behind ever-changing legislation to force South Africans to be financially more disciplined. Having the right attitude about money is the first step, and for many this starts by becoming financially literate.