What is life insurance?

What is life insurance?

Life insurance is a form of cover that pays out when a person, in whose name the life insurance policy was taken out, passes away. In exchange for regular premium payments during the plan holder’s lifetime, the insurer agrees to pay the beneficiary or beneficiaries a sum of money when the policy holder passes away.

Life cover is a popular type of insurance that forms part of many individuals’ personal finance plans because it is widely considered to offer peace of mind and security for loved ones. The payout from a life insurance policy could positively impact the lives and future of the people you care about after you pass away, ensuring they are taken care of when you are not able to do so yourself.

Critical illness cover is another type of insurance that is often offered as an optional add-on to life cover, so your financial advisor would typically talk to you about the two in conjunction.

Types of life cover

When considering your options, it is useful to understand the different life insurance plans. There are various kinds that cater to particular needs and personal circumstances. Here’s a brief overview to help you make an informed decision:

  1. Term life insurance: This type of life cover is valid for a specific period – usually 10, 20 or 30 years. If you pass away within this term, your beneficiaries receive the death benefit.
  2. Whole life insurance: Unlike term life insurance, whole life insurance provides coverage for your entire lifetime, as long as your premiums are paid. Some policies also give the option of a savings component that accumulates cash value over time. 
  3. Universal life insurance: A flexible plan that combines life cover with an investment component. You can adjust your premium payments and death benefit amount as your financial situation changes. Universal life insurance offers the potential for cash value growth, providing both protection and investment opportunities.
  4. Critical illness cover: A lump sum payment if you are diagnosed with a specified critical illness, such as cancer, heart attack, or stroke. Critical illness coverage can help with medical expenses and support your family while you recover. Many life insurance plans offer critical illness cover as an optional add-on.

Benefits of life insurance 

The key advantages of a life insurance policy include:

  • Financial security: The primary benefit of life insurance is providing financial security for your loved ones. The death benefit can cover living expenses and help to ensure that the people you care about can maintain their standard of living.
  • Debt repayment: Life insurance can help settle outstanding debts, such as a home loan, vehicle finance, or store card and credit card balances. Then your family will not be burdened with these financial obligations at a time of grief and loss.
  • Funeral costs: Funerals and memorial services can be expensive, and a life insurance policy can cover these costs, easing the financial strain on your family.
  • Estate planning: Life insurance can be a key component of your estate plan. The death benefit can provide liquidity to cover estate taxes and other expenses, ensuring the smooth transfer of assets to your heirs.

Life insurance and your estate plan

Apart from providing liquidity within your estate, life insurance can add further value to your personal finance plan: Under South African estate law, the proceeds from a life insurance policy are typically paid directly to your beneficiaries, bypassing the winding-up of your estate. This means that these funds will not be subject to estate duty, providing a tax-efficient way to transfer wealth to your loved ones.

It’s a good idea to review your life insurance policy once a year, and to update your beneficiaries to reflect any changes in your personal circumstances. Well-structured life insurance can help your family avoid legal complications and strengthen their financial security.

By understanding the different life insurance options and the benefits of comprehensive life cover, you can make informed decisions to protect your family’s future. For additional security, remember not to overlook critical illness cover if your budget allows.

Secure your peace of mind with a reliable life insurance policy that aligns with your personal and family circumstances, as well as your financial goals.

Whether you’re in need of a will, life insurance, education cover,
or the power of all three, we have got you covered.