How to Purchase Life Insurance in South Africa

There are two basic types of life insurance to consider; term life insurance and whole life insurance. There are several types of whole life insurance products and the following is a summary of each.

Term life

A term life policy is the easiest to understand. This simple policy has a set lump sum payout in the event of the policyholder's death. There is no cash value to the policy. It pays only the policy limit to the person that you designate - no more, no less.

This is called a term policy because it there is an expiration date to the policy. A 10-year policy expires after 100 years. At that time, the policyholder needs to take out a new policy if coverage is still needed, however as the policyholder ages the insurance becomes more expensive.

Whole life

A whole life policy is a bit different. The most obvious difference is that it does not have an expiration date. The second difference is that a whole life policy builds a cash value over time. Portions of the premiums paid every year are invested and the insurance company manages those investments.

The whole life policy will also have a policy value that will be paid upon death. In addition, the cash value builds over time through the accumulation of interest. Often this accumulation is tax deferred and you have the option of using dividends to pay toward the premium.

Another benefit to a whole life policy is that the premium is set for the life of the policyholder and cannot increase.

One of the drawbacks to a whole life policy is that you cannot participate in the investment mix.

Variable life

A variable life policy is a whole life policy that has an added benefit of allowing the policyholder to participate in the investment of that portion of premium that is allowed under the policy. With this added flexibility comes added risk however. The ultimate death benefit will vary in relation to the performance of the invested cash value accounts, which means that you essentially have less control over the death benefit.

This type of policy is a little more risky but does offer the potential of greater returns based on the quality of the investments.

Universal life

This is the most flexible of any whole life policy. Its biggest advantage is the flexibility of premiums and of the face amount. You are not able to influence the type of accounts that the cash value is invested.

You are able to borrow or withdrawal against the cash value of this policy.

Universal Variable

This policy gives you more control of the cash value account than any other type of whole life policy. As with other policies, a death benefit is paid to whomever you choose, and portions of the premium are invested into low risk, tax deferred accounts. The biggest difference is that you are solely responsible for managing the investments and you are held accountable for the returns. There is a direct link between the performance of the policy and your investment decisions. The premiums for a policy of this type are typically much larger than other types of insurance policies.

Be sure to fully understand the type of policy you are buying before making a life insurance purchase. Consulting more than one financial advisor is a good start, but make certain that you all of your questions are answered to your satisfaction before signing up.