Term vs whole life insurance

An early start to life insurance makes it easier to choose between the premium pattern and duration of life cover.

In the industry, life cover is referred to as “term life insurance” or “whole life insurance”.

Term life policies are sometimes referred to as temporary life insurance.

This is bought for a defined period and premiums are paid for its duration.

If you die or are disabled (if your policy covers this) during the period, your family or beneficiaries will receive a stipulated payment.

The premium is assessed on age, general state of health and habits (non-smoker, smoker etc).

The advantage – especially when you’re young – is that this sort of insurance allows you to tailor your coverage.

For instance, you may buy a property and are committed to paying it off in 10 years.

The term insurance will allow you to pay a premium and get covered for this period.

If something happens to you, the amount you insured your life for will be paid out to the people you’ve named, who can then settle the outstanding balance on the property.

This type of policy enables you to choose a term that coincides with the years when you or your family would be most financially vulnerable.

Term life is a good choice if:

You need life insurance only to cover a certain period, such as the years you’re raising children or paying off your mortgage.

You want the most affordable coverage.

You think you might want permanent life insurance, but can’t afford it. Some policies are convertible to permanent cover.

Whole life insurance, or permanent insurance, normally refers to cover that doesn’t cease with age.

Premiums might be higher or payable for a longer duration because the policy stays in force until death occurs.

Consider whole life if:

You want to provide money for your dependants.

You have a lifelong dependent, such as a child with special needs. Life insurance can fund a special-need trust to provide care for your child after you’re gone.

You want to spend your retirement savings and still leave a legacy or money for expenses for your beneficiaries.

You want to equalise inheritances. If you plan to leave a business or other property to one child, you could use whole life insurance to compensate other children.

With whole life insurance, the amount of the payment can be set and is a guaranteed payment.

The earlier you take out this insurance, the lower the premium.

Moneyweb

Normally you can’t access money invested in a retirement annuity (RA) until you turn 55. There are, however, three exceptions. If you’re no longer contributing to the fund and have less than R7 000 saved. Then you’re entitled to withdraw the full amount.

If you financially emigrate. Government will allow you to withdraw everything and take the money with you. You’ll be taxed at normal rates for a withdrawal.

If you’re permanently disabled. This is effectively treated as early retirement. You can take the full amount if you have less than R247 500 in the fund.

Otherwise you can take up to one third as a lump sum, taxed at applicable (South African Revenue Services) rates, and you must use the rest to purchase an annuity.

Applying

Investors must appreciate that the threshold for what’s considered a “permanent disability”