What types of life cover policies are there?

Life insurance companies offer different types of life cover polices to meet different individual needs. First time consumers sometimes find it difficult to understand the differences and level of cover provided by each type of insurance policy. There are many things to look at before you can choose a life insurance policy that is right for you. There are basically three types of life insurance policies that are available on the South African market. These are term life insurance, universal or whole life insurance and variable life insurance policies.

Term life insurance

This is a type of insurance whereby the coverage is for a specific term or designated time period. the most common policy periods you find are one year, five years, ten and twenty years. If the owner of the policy dies within the term, the insurance company will pay out the face value of the life insurance policy. If however the policyholder lives longer than the policy term, the insurance company won’t pay anything. If you are looking for temporary protection and for something that is relatively cheaper you may need to consider term life insurance. There is no cash build up during the term of the policy. A term life insurance policy is a renewable policy because you can renew the policy after the policy expires.

Whole life insurance

This is different from term life insurance; it provides insurance cover for the entire life of the policyholder. The insurance company will not look at how much premium they have collected or how long you have been with them. The policyholder can choose to pay the premiums as a lump sum when they take out the policy or they can take out a monthly policy. Part of the premiums on a whole life insurance will cover administration costs, another part goes towards the insurance aspect and the rest will be invested. Insurance companies will invest the premiums in different investment vehicles such as bonds, stocks or mutual funds. In South Africa, the interest obtained from the investment portion is tax free until the policyholder has withdrawn it.

Variable life insurance

Variable life insurance is a type of whole life insurance and just like with whole life insurance a portion of the premiums will go towards admin expenses and another towards term life portion. The main difference is on the investment portion. The policyholder can choose where they want to invest their premiums, there are different investment options to choose from. You will however find that a variable insurance policy is a bit more expensive than other forms of life insurance policies. Death benefit amount will depend on the performance of your investment.

Convertible and non-convertible life insurance

You will also find convertible and non convertible life insurance policies. With a convertible life policy, the policyholder can switch his term life policy into a whole life policy or a variable life policy.

The type of life insurance that you take will depend on your needs and affordability. The best thing is to talk to a licensed and trained financial advisor. They will assess your financial needs and risk portfolio to help you choose the right type of insurance.