What Types Of Life Insurance Are There?

There is no need to feel like Hannibal crossing the Alps when you have to make a choice between the more-than-a-hundred different life insurance products on the insurance market today. Although they are branded differently, marketed differently and packaged differently, they are in essence variations of only four common life insurance types.

These four types of life insurance are classified into two categories:

  • Without-profit, and
  • With-profit.

Without-profit

Insurance types that fall in the without-profit category do not come with client investment accounts, and offer no cash values to the policy holder until his or her death. There are three life insurance types that fall into this category: Term, Credit Life and Whole Life.

Term Life Insurance

When you take out a term life insurance policy, you contract with the insurer to cover your life for a predetermined number of years. There are two options here: level term and decreasing term.

Level term

Level Term involves making fixed payments (level-premiums) every month for the duration of the term. It is useful if you foresee a spike in your expenses that is of a temporary nature. Example: When your child goes to university, you may want extra cover for four years to ensure that he or she can continue attending, should you die.

According to the Insurance Institute of South Africa, term insurance has lost its popularity with consumers and insurers alike. In spite of the fact that this type of insurance is inexpensive, a growing consumer preference for the new generation Whole Life and Universal Life insurance types has seen the demand for term insurance diminish sharply.

The drop in the number of policy holders naturally had a negative effect on the product’s economic viability. The reduced profitability of term insurance coupled with the ever-increasing threat of high AIDS claims, have led to term insurance rarely being offered as a level-premium standalone policy anymore.

Decreasing term

Decreasing term is used to provide cover for decreasing financial responsibilities, such as debts. It works on the principle that as your debt decreases, so do your payments. Example: If you have a personal loan to repay, you could take out decreasing term cover to ensure that your family is not burdened by the debt should you die before it is settled.

Unlike Level Term Insurance, Decreasing Term insurance is still widely used – especially for mortgage cover. When using a decreasing term policy to cover a mortgage, you will be required to cede the policy to the bank. Should you die before your mortgage is paid, the insurer will pay the bank directly to cover the balance on your mortgage.

Credit Life Insurance

Credit Life Insurance came into being when banks, lenders and retailers arranged with long-term insurers to design an insurance product that would specifically address instalment-type debt.

Although it can be reasonably debated that Credit Life Insurance is merely Decreasing Term Insurance under a different name, the Insurance Institute of South Africa – for one reason or the other – decided to classify it as discrete from Decreasing Term Insurance.

Regardless of whether it is different or not, the fact remains that Credit life insurance had its foundations in decreasing term insurance because, as your debt reduces, so does your premium.

The only two differences worth mentioning are:

  • With term insurance, you need not provide evidence of health. With credit life insurance, you don’t.
  • With term insurance, you need to cede the policy to the lender. With credit life insurance, the cession is normally built in.

The NCA has had an impact on this particular life insurance type because banks are no longer allowed to force you to buy their insurance products as a condition of your loan being approved. Further to the NCA, the Long-term Insurance Act (Section 44) makes it clear, that to meet a lender’s loan condition of life cover, you are legally entitled to purchase a new life policy through the insurer of your choice or use one of your existing, unburdened life policies instead.

Whole Life Insurance

Whole Life Insurance, in its basic form, is a level-premium policy that offers no cash values and that pays the amount of cover you initially selected to your beneficiaries upon your death.

When you contract with the insurer, you can make an arrangement to pay more at the outset and then to stop your premiums at the age of 60, 65 or 85. When your premiums stop at the predefined age, your life cover will continue.

One of the options normally available on a Whole Life insurance policy is something that is referred to in the Insurance industry as ‘riders’. Riders allow you to increase your cover (maximum 20% at a time) at predefined intervals without providing evidence that you are in good health.

With-profit

Insurance types that fall in the with-profit category come with client investment accounts, meaning that you can avail yourself of the policy’s cash values for as long as the policy remains in force. There is currently only one basic life insurance type in this category: Universal Life.

Universal Life

The reasoning behind the development of the Universal Life policy is that insurers wanted a product that would offer sufficient flexibility to meet the needs of a policy holder throughout his or her life. Universal Life, for this reason, is the most complex of all the insurance types.

Unlike the other life insurance types, each Universal Life policy has its own separate investment account. Your monthly premiums, which is calculated based on the life cover and the supplementary benefits you require, are paid directly into this account.

Around the beginning of each month, the system will make a calculation to establish how much money is available in the investment account. This amount will be deducted from the amount of life cover and supplementary benefits you require. Cover will then be purchased on the balance only. To demystify this a little, here is a practical example.

On your Universal Life Policy you have a requirement for R 500,000 in life cover. When the system does its monthly calculations, it transpires that you already have R 50,000 in your investment account. Because R 50,000 is available, you will only need to purchase R 450,000 in life insurance for the month ahead to achieve your desired cover of R 500,000. The premium needed to buy R 450,000 in life cover is then calculated and drawn from your investment account.

In other words, as your investment account increases, the amount needed to maintain your desired life cover, will decrease. In time your Universal Life policy will reach what is called a breakthrough point – that point in time when your investment account is bigger than the life cover you require. When this happens, it will no longer be necessary to purchase life insurance and your entire monthly premium will remain and grow in your investment account.

Three of the benefits that seem to hold the greatest appeal are that:

  • You can change, remove or add cover and benefits at any point in time,
  • You have the option (as is the case with Whole Life) to cease payment when you reach a certain age, and that
  • Universal Life is offered at a low premium rate.

To conclude

These basic life insurance types are frequently offered with some supplementary benefits (such as disability, dread disease, trauma, savings, retrenchment etc.) built in, and then given a different name. By recognising the basic types in any one of these offers, you will be in a better position to identify which one would be the best match for your particular requirements.