Life Insurance – are your beneficiaries guaranteed a pay out
I don’t know about you, but I know that every time a telesales agent calls to try and sell me a policy that is only worth anything if I die, I kind of get the feeling that I’m buying into an omen.
There are many individuals out there that value the importance of life cover and see it as a necessity for their children or whoever they feel they might wish to bequeath money to in the event that they are no longer around.
Whether you’re like me (the former) or like most, I’m sure that falls in the latter, it doesn’t make a difference whether you’re for it or against it when it comes to certain things. A perfect example is that of a home loan. If you are purchasing a home, one of the mandatory parts of the sale is to ensure that you have life cover in place for the bonded value. Meaning that if you paid an R100,000 deposit and took out a bond for R900,000, the life cover would have to cover the R900,000. Your premiums are thus calculated based on the value of the life cover, which also means that as time goes by and the bond amount decreases, so does the premium.
A common misconception is the one where individuals with life cover seem to think that no matter how long they are fortunate enough to be alive when they do one-day breath their last breath, the insurance policy will handsomely pay out all noted beneficiaries. It is life insurance after all isn’t it? They did say that they would payout in the event of my death.
They weren’t entirely lying, since they would payout in the event of your death, they just failed to mention that the period you’re allowed to die in (sounds awful) might in fact have an expiry date. It’s true and you should know the difference between the two types of life cover because there are many that will only pay out upon death up until a certain age. Since everyone is going to die at some point of natural causes if not through early tragedy, insurance companies see that as a risk because all payouts are guaranteed, therefore they put an age limit on it. So what are the two types of life insurance cover and how exactly do they differ?
Term life insurance
Term life cover is for (you guessed it) a “term”. It directly refers to any life insurance policy that comes with an expiry date on the death benefit. How it works is that once the insured member reaches a certain age, the policy is no longer valid to be paid out upon the death of the member. Since these policies are significantly cheaper, it’s a very common choice for a lot of South Africans. They choose this policy primarily because they don’t believe there’s a guarantee the whole life policy will actually payout.
These days it’s also not that common that people to have dependents in need of financial aid when they retire, so they too might opt into this type of policy. No matter the reason behind your choice, the point is that you understand which choice you have made. With each option comes a set of conditions and they should suit your needs now as well as later.
Whole life insurance
Whole life insurance is the life cover that we all believe we have. It’s therefore important that we actually read the fine print in our policies to ensure that it is what we need. It is the cover that pays out in the event of your death whether you passed away early in life through tragedy or otherwise, or whether you said goodbye to your loved ones at a ripe old age due to natural causes. They do not expire and the beneficiaries loaded on your policy are the ones to whom the money is bequeathed to.
There are whole life insurance policies that include a death benefit that converts to annuities. What this means is that the payout is returned to the policy’s insured through small lump sums for a specified period of years. The insurance policy still functions as a whole life policy because the annuities can be bequeathed as with the funds.
The cost per month for this type of life cover is, as you would have assumed, much higher than the term life insurance. The primary reason is that it is a guaranteed payout. Whether it’s through death or annuities, the insurance company has to and will give you or the beneficiary the sum of the policy.
Where term life insurance might be a prerequisite for certain home loans and other asset or investment purchasers, whole life insurance is typically offered via a broker from an insurance firm that has this product in their product offerings.
So, if you think you and your loved ones are covered, check again, there’s no harm and you might discover that you have a policy-type amendment to make.