What is Life Insurance?
Life insurance is a product many of us try to ignore thinking about for as long as possible because of the unpleasant connotations around it. But as it is designed as a means of provision and support for your family in case of loss, there are few insurance products as important.
Life insurance, or life cover, is an insurance product that includes a cash payout that supports your family (wife, children and other family members where applicable) financially when something happens to you. Ideally, the provision helps the family maintain the same lifestyle and pays all outstanding debts.
Is Life Insurance really necessary?
Whether you believe you're going to 120 or not, it's important to consider this product if your savings and investments are unable to meet the needs of your dependents. If you're serious about having peace of mind now, and in the future for the welfare of your family members, you probably need life insurance.
If others are dependent on your income or salary you need life cover to provide for them once you are gone. It's not about the expense on your budget sheet now, but about the future of those you care about.
When do you get life insurance?
As we mentioned above, you probably need life cover if others are dependent on you. This includes long-term relationships, getting engaged, married or creating the future generation of South Africans (a.k.a getting babies). Most of the time, these are milestones in life and beg a bigger sense of responsibility when it comes to finances.
A part of this responsibility is making sure those you care about are taken care of when something happens to you (whether it's passing away or other another form of work incapability).
Still a little bit unsure about the type of decisions that should lead to getting life over? Here are a couple of defining moments to consider:
- Relationships where others are dependent on your income
- Buying a house for you and your dependents to live in (who wants to move out while mourning a loved one?)
- The future of your children (should their education stop when you're out of the picture?)
2 Common types of Life Insurance
The exact benefits and payout will be determined by the provider of your life insurance, but typically there are 2 types of life insurance options in South Africa.
Whole Life Insurance
Whole life insurance is maintained throughout your life and covers you throughout your life. A portion of the policy (or premiums paid) will be invested and therefore this combo of investment and life cover is a more expensive option than the standard life insurance policy.
The only way to stop a whole life insurance product is when you pass away or when you "surrender" the life policy. By surrendering the policy, you are cancelling the policy and will be held liable for the fees associated with this step. The reason people do this is to access the cash value of the life policy. The negative side of this step is that you might not get the same value in your premium when you take out a new policy due to the increased health risks when you are older.
Term Life Insurance
As can be seen in its name, this type of life insurance policy only covers the insured person or family for a certain period. After this period, it needs to be renewed to continue the life cover of the product. This period is predetermined and can, therefore, be planned. Some people choose this option because they feel they can accrue enough money in this period to provide for their family in the case of their death and after this period, it's an unnecessary expense to maintain.
Term life insurance typically caters for some of the milestone timeframes in your life like buying and paying off a house. Compared to whole life insurance, term life insurance can be more affordable but come at the cost of little benefit and no investment or cash value when they end.
When you are looking at life insurance options, remember to keep factors in mind that are not as severe as death, but equally crippling in your ability to generate further household or estate income. This means you might consider a more comprehensive insurance option that covers a crippling disease or death, disability and even retrenchment.
What influences the cost of your Life Insurance and how much do you need?
As with all insurance products, risk is the primary culprit in determining the cost of your premium.
The monthly cost of your life cover premium can be influenced by:
- Your age (younger ages are typically less expensive)
- Your health (being healthier is cheaper)
- Harmful habits (like smoking, drinking and other drug uses)
- Profession (high-risk work increases your premium)
- Lifestyle (high-risk activities like extreme sports will count against you)
- Who it needs to cover
In some cases, a medical exam might be required by your life cover service provider to determine some of the above. Remember that lying about any of the above can severely damage the changes of your life cover paying out or cause a long delay in the funds being released.
So, how much is enough?
Many people board the gravy train of greed when choosing the cover amount and unfortunately pay the crippling monthly premium for that. As with all things finance, budget and cash flow should be front of mind.
Remember, the idea of life cover is to provide for your family if something happens to you. Therefore, you need to look at the costs of your lifestyle and use to navigate the amount of cover you need. Keep the following living expenses in mind when choosing life cover:
Fixed monthly expenses (bond repayments, cars, school fees, medical expenses etc.)
Household expenses (food, utilities, etc.)
Future expenses (future lifestyle quality, big life events, education, bigger family)
Once you have an idea of your annual expenses over a certain timeframe, it's time to see what premium (including its benefits) fits your monthly budget. Start with the basics that will equip your family to continue life without and other benefits as you go along.