Life insurance is a tool designed to protect both you and your loved ones in times of need. With a wide variety of options available, life insurance can serve multiple purposes—it’s not just about death, but also about providing financial security in the event of disability, retrenchment, or other life-altering circumstances. Since everyone’s situation is unique, the type of life insurance that suits you will depend on your needs, lifestyle, and financial goals.
Life Cover
As the policyholder of a life insurance policy, you will pay a monthly premium to an insurance company over a specified period. In return, the insurer guarantees to provide policy benefits (for instance, a lump sum of money) to you, the policyholder, or your nominated beneficiaries in the event of certain specified occurrences, such as death or disability.
The individual covered under the policy is called the “life insured.” Depending on the insurance company’s terms, a single policy can cover more than one life insured. There are different types of life insurance policies designed to cater to varying needs, as shown below:
Death Cover
Death cover is a form of life insurance with the primary objective of providing a financial benefit to the policyholder or their beneficiaries if the life insured passes away. This form of cover is purely risk-based and does not have an investment component, meaning that if the policy is canceled without a claim, the policyholder will not receive any money back.
Permanent Life Insurance: Whole Life
Whole life insurance is a type of life insurance that offers coverage for the entire life of the insured, provided premiums are continuously paid. A portion of the premium goes into a savings or investment account, allowing the policy to build a cash value over time. This cash value can be accessed through policy loans or by surrendering the policy. However, accessing this cash value comes with some risks and disadvantages:
- Policy Loan Repayment: If you borrow against the policy’s cash value, interest will accrue, and you will need to repay the loan with interest.
- Surrendering the Policy: Cancelling the policy and taking the accumulated cash value may lead to surrender charges, and you will forfeit any future claims.
Whole life insurance is ideal for individuals who want to leave a guaranteed amount of money to beneficiaries for a specific purpose, such as paying off debts or covering funeral costs.
Permanent Life Insurance: Universal Life
Universal life insurance offers more flexibility compared to whole life insurance. Here are the key features:
- Flexible Death Benefit: You can reduce the death benefit in exchange for a larger cash payout.
- Flexible Premium Payments: Premiums can be paid at any time and in any amount, offering more control over how you manage your policy.
- Policy Loans: Universal life policies typically do not charge interest on loans taken against the policy’s cash value, unlike whole life policies.
- Interest Rates: While whole life policies guarantee the interest rate on the savings component, universal life policies may not offer this guarantee, and interest rates can vary.
Term Insurance
Term insurance is designed to provide life cover for a fixed period, such as during the term of a home loan or while children are dependent on you. Once the term expires, the coverage ends, and no premiums are refunded. Term insurance is typically the least expensive form of life insurance but does not accumulate any cash value or provide any return on premiums if no claim is made.
Endowment Policies
Endowment policies serve a dual purpose: they provide life insurance cover while also acting as a savings or investment vehicle. With an endowment policy, you pay a premium for a specific period, after which a lump sum is paid out to you. The death benefit is paid if the life insured dies before the policy matures. These policies are designed to pay out during the insured’s lifetime, offering financial support for things like retirement or other significant life expenses. If the policyholder passes away before the policy matures, the death benefit is still payable to beneficiaries. As the policy nears maturity, the surrender value of an endowment policy usually increases significantly.
Funeral Cover
Funeral cover is designed to cover the costs associated with a funeral. Depending on the policy, it may offer benefits either in the form of cash to cover funeral expenses or directly to a service provider. Funeral cover ensures that your loved ones will not face financial strain when dealing with your passing.
Disability Cover
Disability cover provides financial protection in the event that you become disabled due to an accident or illness, rendering you unable to work. Disability insurance can replace lost income or help cover the costs of medical care and rehabilitation. This type of cover is often included as part of a life insurance policy but can also be purchased separately. There are two main types of disability cover:
- Capital Disability Cover: This form of insurance pays a lump-sum amount if the insured becomes permanently disabled. The payout is made once the disability is verified as permanent.
- Income Protector or Recurring Disability Cover: This cover provides a monthly income if the insured becomes disabled, either temporarily or permanently. The payout can continue until the policy matures, the insured recovers, or the insured passes away.
Retirement Annuities
Retirement annuities are long-term savings plans designed to provide a regular income during retirement. Depending on the type of annuity, you may access your savings starting at the age of 55 or upon retirement. A portion of your savings (up to one-third) can typically be withdrawn as a lump sum, while the remaining balance must be reinvested to provide a steady monthly income during retirement.
Living Annuities
Living annuities are a type of investment product that pays you a regular income during retirement. As a member of a pension, provident, preservation, or retirement annuity fund, you must use at least two-thirds of your fund proceeds to purchase a living annuity. The amount you receive each month is determined by how your investment grows. Upon death, your beneficiaries can choose one of the following options:
- Lump-Sum Withdrawal: They can withdraw the remaining balance as a lump sum.
- Continuation of the Annuity: The annuity can be transferred to their name, continuing to pay them an income.
- Partial Withdrawal: They may choose to make a partial withdrawal and leave the balance as a living annuity.
Guaranteed Annuities
A guaranteed annuity is an insurance product where the insurer guarantees to pay you a fixed monthly income for life. This provides financial security in the event that you live longer than expected. The income from a guaranteed annuity is not linked to the performance of any investments, so you are assured of a predictable income stream. However, the downside is that your capital is not passed on to your beneficiaries, and the payments cease when you pass away.
With so many options to choose from, understanding the different types of life insurance policies is essential in selecting the one that best suits your needs and goals. Whether you are looking to provide for your family, secure your retirement, or ensure financial support in the event of a disability, there is a life insurance policy designed for you.
