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March 4th, 2015 by


04513bd - All You Need to Know About Life Insurance

By Hayley Axford

Life is full of uncertainties; we never know what may come our way. No one has been promised a tomorrow, so we should take every new day that comes as a blessing. The beauty of it is that we have today, a day to plan ahead for the sake of our loved ones, should we not see this day to completion.

Every person that has worked to make a living to provide for themselves and their families, imagines growing old and having accumulated sufficient wealth to live their last days in comfort and still leave enough money in their wills to give their children a head start to a successful life.

Life insurance is the best way to protect your family from the financial strain that would be placed upon them if you were no longer around.  Taking out a life insurance policy with an insurance company, is a signed contract of agreement that in exchange of paying monthly premiums, your beneficiaries will receive a lump-sum payment (death benefit), should you, as the insured, die prematurely.

While it has been said that not everyone needs life insurance, the general rule is that it is needed if you have dependents, such as a spouse and children who are still at school or are yet to graduate from university. In some cases, ageing parents can also be included as a beneficiary if they depend on you.

Benefits

When buying a home, it is common to sign up for a 30-year mortgage, but this could be affected if you die ten years into the mortgage payments. Life insurance can settle your outstanding debt, to prevent your family from being evicted and also  provide ongoing income for your dependents until they are able to live without it. In the event that you sustain a disability from an accident and are unable to work, it can also provide for everyday expenses such as school fees and utility bills, as well as potential legal and medical costs. By taking out a policy, you are thus providing a safety net should these unexpected circumstances occur.

How much life insurance do you need?

Life insurance forms part of a larger financial plan. Typically, a policy is chosen based on the needs and goals of the owner. How much life insurance you buy depends on the specific financial needs and circumstances of your family. Things to consider are: How many kids do you have? Do you intend on paying for their tertiary education? How big is your mortgage and what other debts do you have?

It is important to find a balance between being over-insured and under-insured. Paying too much for high premiums can be just as destructive to your overall financial plan as paying too little for the insurance you need to ensure that you are fully covered.

Each life insurance policy is tailored to your specific risk profile (each client is different).  When you apply for an insurance policy, you will be expected to provide a full medical history (including family history) as well as questions regarding your lifestyle. This information is used by insurance actuaries to determine your risk profile and how your premiums will be calculated.

Factors affecting risk profile:

  • Age: Younger individuals will pay a lower premium, due to the decreased likelihood of dying from natural causes at a young age.
  • Gender: On average, premiums are slightly lower for women as statistics have proven that there is an increased probability that they will live six years longer than men.
  • Health: If you have a current health condition or a history of illness, the risk is much higher than that of a healthy person. It is important to note that pre-existing medical conditions (chronic medical diagnosis prior to taking out a policy), such as mental illness, or a strong family history of heart disease or cancer, will raise your insurance premiums. It is also advisable to note that some insurance companies in South Africa will not pay out if the policy holder dies from such a condition.
  • Lifestyle: If you participate in dangerous sports, the risk of injury is higher and this would affect your premiums. Smokers can also expect to pay rates that are almost twice as high as non-smokers. The same applies to people who have had a past dependency on alcohol and drugs.

Life insurance claims can also be denied, such as in the case of suicide, which most policies do not cover. Also, if an insurance company suspects that a claim is fraudulent, it will fully investigate the matter. Payments can be denied if a claimant lied about the cause of death or if the policyholder neglected to mention pre-existing medical conditions, hazardous jobs or dangerous hobbies.

South Africa has a variety of companies that offer life insurance. CompareGuru offers a comparison service for insurance quotes and will be able to refer you to a quality insurance company who can tailor a policy specifically for your needs.

Like Benjamin Franklin said, there are only two things in life that are certain: death and taxes.