Help & Information

Life Insurance Demystified

Put simply, life insurance allows an individual to pay a monthly amount (called a premium) to a company in return for their promise to pay out a relatively large amount of money in the event of the insured person’s death (or permanent disability).

The premium is based on the size of the benefit provided. This is based on, amongst other things, the likelihood of a claim occurring during the life of the policy.

Insurance provides for the losses of the few, paid for from the premiums of the many. This is a risk transfer agreement whereby the responsibility for providing for dependents—earning an income for one’s family, for example—in the event of death, passes from one party (the life insured) to another (the insurer) on payment of a premium.

The insurance industry has therefore evolved as a response to people’s need to manage risk in their lives, particularly to help people plan for the unexpected.

Insurance companies will usually limit the amount of cover available based on the life insured’s income—the life cover is meant to make up for some of the income that the deceased person would have earned over some period, and usually cannot exceed the income that an individual would have expected to earn over a number of years.

Life Insurance Terms

Types of products typically offered

Insurance companies offer a wide range of life insurance policies to be able to meet different people’s needs. The most common types of policies are term insurance and whole life insurance. In addition to these, AllLife also provides loan protector policies.

Term Life

A term life insurance policy pays out a defined value should the insured die during the term specified. For example: a R500 000 level cover term life policy with a ten-year term taken out today will pay the insured’s beneficiaries R500 000 if the insured dies within the next ten years.

The simplest form of a term life policy requires the insured to make equal premium payments throughout the term. This is known as a level-premium policy (AllLife’s term policies are all level-premium policies).

Level-cover term policies provide a fixed amount of cover throughout the term of the policy. AllLife’s 10-year and 20-year level cover policies are examples of this type of policy.

Whole Life

A whole life insurance policy pays out a defined value in the event of the insured’s death for as long as the policy is paid up.

AllLife provides both level-premium and escalating-premium whole life insurance options. The escalating premium makes the policy cheaper at inception, but with premiums increasing at 5% per year. Level-premium policies maintain a constant premium for the life of the policy.

Loan Protectors

AllLife provides a set of loan protector policies designed to match the outstanding balance on an amortising loan. The cover provided will settle a loan that has been paid in accordance with the schedule set by the lender, without allowance for readvances.

The term of the loan protector policy must match the term of the loan to be effective in covering the outstanding loan.

Policy Cessions

Any of our policies can be ceded to a bank or another lender as security against a loan if required. Lenders may require life insurance to secure a home- or business loan, or to guarantee that these assets will not need to be repossessed in the event of your death. Please contact us for a policy cession form if you need to cede your AllLife policy and we will help you through the process.

Age Rated Premiums

AllLife does not offer age rated policies as we feel that the annual premium escalation on these policies places unreasonable pressure on our clients’ affordability. Premium escalation on age rated policies can be of the order of 7.5% per annum, implying that premiums on such policies will double every 10 years. Top

Which Policy is Right for You?

Life insurance is a very important part of personal financial planning because it is a rapidly available source of cash for a person’s dependants upon the insured’s death. Within a few months, the insurance company will make a lump sum payment to the designated beneficiaries. This provides the money needed to settle debts, and to pay dependents’ living and education expenses for a significant period of time.

Young to middle-aged people generally use term life policies to make provision for liabilities that will not last forever. Term life coverage is often purchased to ensure funds are available for a child’s education, to provide income for a surviving spouse, or to pay off a home loan. For example, if the insured’s children will be educated and independent in another 8 years from now, then a 10-year term life policy will provide for them in the event of the insured’s demise.

Assessing Your Insurance Needs

• Before purchasing a life insurance policy, consider your financial situation and the standard of living you want to maintain for your dependents. For example, who will be responsible for funeral costs and final medical bills in the event of your death? Will there be adequate funds for home loan payments, education and other living expenses?
• You should reevaluate your life insurance needs whenever you experience a major life event such as marriage, divorce, the birth or adoption of a child, or purchase of a major asset such as a house or business.
• If you are not sure of your needs, you should discuss them with a trusted advisor such as your bank manager or insurance broker.

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