WHAT IS LIFE INSURANCE?
What is life insurance? Some of us may have heard about ‘life insurance’ in various professional circles, but may have never really thought what it meant, in a South African context. Let’s find out what is said about the subject.
Please bear in mind that there are many opinions and thoughts about life insurance. None of the following should be seen as advice but rather as a collection of opinions for informational purposes only. Please seek the advice of a registered financial advisor when buying life insurance and life cover products.
WHAT IS LIFE INSURANCE DEFINED AS?
In South Africa, life insurance is a contract between a person who takes out a policy (known as the ‘policyholder’), and the life insurance company or ‘insurer”, in exchange for a premium. In such a contract, the insurer will pay a specified beneficiary a certain lump sum (called ‘the benefit’), when the insured person, who is usually the policy holder, dies. In some contracts, when the policy holder is suffering from terminal illness, payment can also be initiated.
WHAT KINDS OF COVER IS AVAILABLE?
There are three main categories, namely, life (or death), disability and dread disease.
LIFE COVER IS NOT NECESSARILY FOR ‘LIFE’
Life cover is not necessarily for life, you can buy it for a fixed period, this is called termed cover, you may save money on the long run with termed cover.2
WHAT AMOUNT SHOULD BE COVERED WITH LIFE COVER?
The amount of life cover should at the very least cover all your debts and liabilities as well as the cost of ensuring financial independence of your children.
WHAT ARE THE TERMS OF A CONTRACT?
The terms of life cover policies, which are legal contracts, include certain limitations. In order to limit the amount of risk to which the insurer is exposed, certain exclusions are included in the contract. Some examples of exclusions involve suicide, civil and riot unrest, war, and fraud.1
THE POLICY OWNER AND THE INSURED DON’T HAVE TO BE THE SAME PERSON
The policyholder and the insured life need not be the same person. It may be that the husband buys life cover for himself, which means that he is both the policyholder and the life insured. However, his wife can buy life cover for her husband, in which case she is the policyholder but her husband is the life insured. The owner of the policy is responsible for all the premium payments. The insured is just part of the contract, and plays a passive role. 1
WHO IS THE BENEFICIARY?
After the insured’s death, the person who receives benefits from the life cover payout, is called the beneficiary. The policy owner stipulates in the original contract who the beneficiary shall be. In general, the policy owner is entitled to change the beneficiary at any stage. 1
WHY MUST THE BENEFICIARY, HAVE INSURABLE INTEREST?
Insurance companies generally only allow those with insurable interest to buy a life insurance policy. Insurable Interest is the interest that a person has in an insured object or in this case, the insured life. The interest is usually a financial interest. Without insurable interest present, there can be no insurance contract because there can be no loss without an interest. People likely to have insurable interest are close family members as well as business partners.3