Do you really need life insurance?
Correspondent | Friday June 16, 2017 16:52
From various policies to terms such as medical underwriting, life insurance is something people do not fully understand until someone takes them through the journey of buying a policy. However, the essence and whole purpose of life insurance is not to enrich the beneficiaries, but rather to maintain their economic status as if the benefactor is still alive.
When making the decision to take up a life cover, you are deciding whether to transfer financial risk that will arise upon the death of the insured, to the insurance company. This means that for a sum of money paid monthly called a ‘premium’, the insurer agrees to take up the financial risk associated with one’s death. People often take up life cover for a myriad of reasons, commonly to protect their liabilities at banks - mortgages, car loans, personal loans and even to leave behind a financial legacy.
There exists in the market different types of death covers. Common amongst them would be the ‘term assurances’ and ‘whole of life covers.’
A term assurance life cover, as the name suggests, has a specific term that it goes on for. Companies will set whatever minimum age they would like their policies to go on for. Let us say we have five years as the minimum term. Maximum coverage age is 70, meaning that any term can be applied for between minimum term and the maximum age. For example, if the applicant is 25, they can get cover for a maximum of 45 years.
This type of assurance is usually useful for covering mortgages and other long and short-term liabilities. Being that it has a term, it is possible that a claim may not arise under this type of cover. For example, say you are 30, and you take a 30-year term but by the age 60 you are still alive, a claim will not arise under death cover because the insured is still alive. The possibility that a claim may not arise makes this type of cover cheaper, but does not take away its usability. A whole of life product, as the name suggests, is for your whole life. Therefore, a claim is guaranteed. You will realise, therefore, that the whole of life will be slightly more expensive than the term assurance. It is actually a brilliant product for purposes of legacies, while at the same time one can use it to cover liabilities as well. One has the option to pick the age at which they will stop paying the premium.
For example, one may decide that at the age of 75 they would like to stop paying the premium, and then actually live until say, age 90 years. With this product, you continue to be covered for 15 more years after you have stopped paying premiums. In other words, you will always be covered. And upon your demise, a claim will arise and be settled according to the terms of contract.
It is worthy to note that the death benefit/cover can be accompanied by any other benefits such as accidental death cover, capital disability benefit, dread diseases. These may be stand-alone or accelerator riders to the main life benefit. The client may opt into their life cover any of the benefits that the insurer makes possible. Since it is a common motivator that insurance involves a transfer of risk, the insurer has to evaluate the risk being transferred before they can accept it. This is where underwriting comes in. The essential evaluation of the subject of insurance, will be discussed in the next article.
DR TIRAFALO OTLHOGILE*
*This article was penned by Dr Tirafalo Otlhogile, New Business and Underwriting Manager at Botswana Life. This will be followed by a series of articles to give insight and practical insurance literacy to the public.