There are basically two different types of Life Insurance available. They are temporary and permanent.
The temporary insurance is generally known as “Term” or “Renewable” Life Insurance whilst the permanent is generally known as “Whole of Life” or “Endowment” Life Insurance.
Life insurance is mainly purchased to provide cover for a mortgage or loan, ensure financial security for a family or business, or to cover final expenses such as funeral and medical costs.
Premiums are payable through a number of options including (1) annually, (2) half-yearly, (3) monthly or (4) via a payroll deduction. Suicide is generally covered after 13 months with most Life Companies.
Term life insurance
Term life insurance, as the name implies, is for a certain period. It protects your family against hardship, resulting from your death during an agreed term of years.
If you live longer than this term, protection ceases and the policy expires. This is because the policy does not have any savings element, just life insurance cover. In many cases, You can renew your term life insurance, but because you will be older and may not be as healthy, your premiums would be higher.
Term life insurance is the oldest form of life insurance, being used by the Babylonians as early as 2500 BC to insure themselves against the death of their slaves.
Sometimes term life insurance is referred to as temporary insurance. Temporary insurance is paid out only in the event of death. In comparison to Permanent insurance, it is much less expensive.
It is available in 3 different forms – (1) Decreasing, (2) Level or (3) Increasing (usually with the Consumer Price Increase). Premiums are generally adjusted each year in accordance to the age of the person insured. Most people drop their temporary insurance as they get older because the premiums become too expensive.
Major benefits include:
- Inexpensive premiums for Life insurance.
- Substantial premium discount for non-smokers.
- Choice of decreasing, level or increasing cover.
- Annually renewable by the Life Insured.
Whole life insurance
Whole life insurance, as the name suggests, provides cover for your entire life, with the sum insured plus bonuses being paid to your estate when you die.
Major benefits include:
- Premiums are fixed for the Life of the policy.
- Cash gains after 10 years are free of personal tax.
- Investment is Capital Guaranteed.
- Life cover increases (via bonuses) whilst the premium remains the same.
- Includes a nonforfeiture provision.
- The policy provides a cash value.
- Creates a nest egg for the future.
Endowment insurance protects your dependents for an agreed number of years. It guarantees the payment of the sum insured plus bonuses at the end of that period or earlier should you die.
For example, endowment insurance may be taken out until the age of 65. If you reach that age, the sum insured and bonuses are paid out and life cover lapses.
Both whole life and endowment insurance have a saving element – the bonuses. Term life insurance pays only the sum insured on death.
Whole life and endowment policies have surrender value; they can be cashed in after a certain period varying from two to six years depending on the company.
Term life insurance by definition has no surrender value but merely expires if the premiums are not kept up to date.
What is the difference between term life and whole life insurance?
Term life insurance gives you the biggest amount of cover because you are paying solely for life cover during a limited period.
The whole life insurance gives less cover for the same money because the life company will be liable for a greater number of years and because the contracts visualize that every policy will eventually end in a claim.
There are many add-on extras available with Life Insurance. They may include (1) Total and Permanent Disability cover, (2) Guaranteed Future Insurability, (3) Special Accident Cover and (4) Cover for Major Illnesses.
As you can see Life insurance can be quite a complex issue.