TERM VERSUS WHOLE OF LIFE INSURANCE
By Franz Smit
I have been very busy with buy and sell agreements this past month (insurance between business partners) and observed again that most clients just want to pay as little as possible for their buy and sell.
While I understand the need to always minimize premium price, at what cost are you doing so?
The most popular way of decreasing the premium of your buy and sell is to term the insurance. This means you take out the insurance for a pre-agreed time period such as 10, 15, 20 years etc.
Term insurance is brilliant, when used correctly and for the right reasons. It can mould your insurance policy to your exact needs and is very successfully used for outstanding debts (like business/property loans) where there is a planned timeframe.
Reducing the term of the insurance policy has a big effect on the premiums you pay - the smaller the term, the smaller the premium. This is because the insurance house now only takes on the risk for 15 to 20 years instead of your life expectancy.
The difficulty is to understand the different insurance companies' view of term insurance.
What happens when a termed insurance policy comes to an end?
Term insurance will end after a certain number of years, i.e. the insurance policy has ceased and you no longer have that cover.
One of two things can then happen and this is dependent on the rules of the specific insurance company:
Either (i) you need to then re-apply for insurance and have full underwriting done again, or (ii) you will be allowed to continue with the same amount of cover but at the new age-adjusted premium without underwriting.
This is a very, very important question to ask before making any final decisions! In the time that you had the term insurance your medical situation can change, one of the partners could have a heart attack etc, and if the policy ends and cannot be reinstated without a full medical, then that partner will probably not be insurable.
Whole of life insurance:
Whole of life insurance is what has been the most sold insurance product in South Africa and is mostly applicable to life insurance.
Whole of life means the insurance cover continues as long as you pay the premium and as long as you are alive. This is the best option to have if you want peace of mind that you can manage the monthly premiums and that the insurance cover won't disappear after a termed period of time.
It is very important to understand this and many other technical issues when putting your company's buy and sell agreement in place. You need to weigh all the options and we need to discuss which options are best for your unique set of circumstances.
If you currently have a buy and sell agreement in place, or need one set up, contact me as soon as possible. Let's make sure about the term. It is possible that you are on whole of life premiums but you are planning on retiring in 10-20 years, in which case you are wasting a fortune in premiums.
Happy landings,
Franz Smit
Please note that this article is the opinion and an interpretation of the South African insurance industry by the author, and is not intended to malign any company or individual. Views may differ from other parties such as insurers or brokers. This article is meant as introductory information only and in no way constitutes advice. For tailored financial advice to suit your personal needs, please contact an independent financial advisor. All content is subject to copyright and may not be reproduced in any form without the express written consent of the author.
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