Many individuals and sometimes even experts use the word “Life Insurance” as a way to refer to funeral cover, life cover and investments. This causes a lot of confusion if you are a layperson and not knowing the difference between these products, can cost you dearly in the long run. So here is a simple explanation to ensure that you understand which is which.
Life cover plus
Life cover can be a stand-alone product or you can add on other benefits that encompass all of the risks associated with living. While they are separate products in terms of their benefits, and they can be purchased separately, they can be bundled together in one policy. These include; critical illness insurance, death cover, disability cover and income protection. These are all products that will financially protect you from life’s mishaps. Some policies offer an investment portion as well. However, be aware of the fact that the investment portion will rarely cover all of your retirement needs.
It can be cheaper to take all of these products as a package. If you are undisciplined and you don’t want the hassle of spending time on managing different products then this may suit you. The downside is that trying to ascertain the value of the investment portion may be a challenge, it is better to keep your risk and investment portfolios separate.
Whole life
Whole life cover is an ordinary life cover policy which is valid until you die or surrender the policy. It covers you against the risk of death. The payment can be used by the beneficiary for any of their expenses.
This policy is ideal for a person who wants to leave a fixed amount of money behind after death, e.g. to pay estate duty and or to leave money for a spouse or to other dependants. It is the least expensive form of life cover. An important part of the policy is the "guaranteed term". This is the period that the insurance company guarantees that the cost of the life cover will remain the same, thereafter they may increase the cost of the cover.
Universal life
This is similar to Whole Life but it has an investment portion included. The return-on-investment portion depends on the nature of the investment. Sometimes the insurance company will only pay out either the life portion of the policy or the investment portion (the greater of the two). This is another reason that you should keep investment and risk policies separate.
Anyone who wants to keep a life policy until they die should consider this type of life cover. If you want to leave your heirs' money but are worried about not having saved enough, or built enough assets, this policy will suit you. If you would like to save a bit extra for retirement you also could use this type of policy.
Term or fixed insurance
Term or fixed insurance is used when you want to provide life cover for a set period, e.g. while paying off a bond on your house. It will provide a lump sum for your family when if you die within a certain period. It has an expiration date. It is not expensive and you can add benefits to it, such as a lump sum for disability. After the agreed period, the cover simply expires. It only pays out a fixed sum when you die and if you don’t die within the term chosen, it simply expires. It is for people who know that their investments will be sufficient to cover their families in the event of their death in old age.
Funeral plan
A funeral insurance policy seeks to provide affordable cover for the payment of funeral costs either individually or through membership of a group that is formed for this purpose. It will cover the funeral expenses should you die. The amount payable is dependent on the amount you pay each month for the premium. It usually has a maximum of a R100,000 payout depending on the plan you choose.
Anyone who does not have enough money in their estate to cover the cost of a funeral. It is a very inexpensive way to ensure that your family are not burdened with the costs. The beneficiary of the policy will receive a lump sum for expenses relating to the funeral. One of the reasons you need this kind of cover is that often when you die all assets and bank accounts are frozen. Your funds only become available to your dependants and/or beneficiaries once an executor has been appointed.
This normally takes at least a month. Burial, however, usually happens within a couple of days, and your family will need the money far sooner than it will be released from your estate. Funeral cover is available almost immediately after your death, in most cases within 48 hours. The money is paid to the beneficiary named in the policy. It can cover a range of things from airtime to catering. Each policy is different so make sure you understand all of the terms and conditions.
Hollard Life Assurance Company (Reg. No. 1993/001405/06) is an authorised Financial Services Provider.
