THE FINANCIAL
SERVICES BOARD
LONG-TERM INSURANCE
I
t is very important to invest in a safe long-term financial plan
while you are still young and employed or self-employed.
Buying long-term insurance is one way of saving for your
old age. Long-term insurance ensures that your dependants will
be provided for when you die, or in some cases, if you become
disabled. It can also provide financial security when you retire.
Some long-term insurance policies ensure that a specified amount
of money will be available for settling your debt (e.g. housing
bond) after your death.
rather than as a funeral.
When buying long-term insurance, make sure that you talk to
various financial service providers as policy terms may differ. Also
make sure that your financial service provider (FSP) is registered
with the FSB.
It is important to note that there are different types of retirement
annuities, namely:
What is long-term insurance?
Long-term insurance is insurance that covers life-changing events
in life, such as death, retirement and disability. You pay a
monthly premium over a long period of time until you die or the
long-term insurance policy matures at a specified date. Longterm insurance includes life insurance and funeral insurance
that provide for your family after your death. It also includes
retirement annuities and endowment policies to provide you
with either an income when you are old or a lump sum payment
on the date on which your policy is paid out.
Everything you need to know about the
different types of Long-term insurances?
Life Cover
There are different kinds of life cover. Life cover includes life
insurance, term insurance and endowment policies.
1. Life Insurance
• Whole life cover is an ordinary life cover which is valid until
you die or surrender the policy. It covers you against the risk
of death. This policy is ideal for a person who wants to leave
a fixed amount of money behind after death, e.g. to pay
estate duty. It is the least expensive form of life cover. The
monthly premiums are invested by the insurance company.
You can borrow against the policy if you wish.
• Universal life cover is similar, but has an investment
component. The return-on-investment portion depends on
the nature of the investment. It does not guarantee a fixed
rate of growth because it is influenced by the investment
performance. However, the chance of rapid growth makes it
a popular choice. Consumers must be aware of the levels
of risk in any investment product as well as their own risk
tolerance.
2. Term Insurance
Term or fixed insurance is ideal if you need to provide life cover for
a set period of time, e.g. while paying off a bond on your house.
It is not expensive and you can easily add benefits to it, such as a
lump sum for disability. After the agreed period of time, the cover
simply expires. As it is a risk product, consumers should be aware
that values can fluctuate.
3. Endowment Policies
Endowment life insurance is in effect a savings plan rather than
simply life cover. You pay a monthly premium for a specified period,
at which you are paid a lump sum. It is different from other types
of life covers in that it is designed to pay you during your lifetime
rather than your beneficiaries after your death. As it is a lump sum
of money, do not be tempted to use it – rather save it.
You can also invest a lump sum in a single premium endowment
policy. It is an excellent way to save a specific amount of money
for a particular purpose, e.g. for university fees. The life insurance
portion comes into effect if you die before the policy is due to be
paid out. However, there are limitations on the benefits payable in
the first five years. Consult an FSP for more detail.
Funeral Insurance
Someone for whom you are responsible may die and you will need
money for a funeral. Funeral insurance provides you with cash for
a funeral or benefits in the form of a funeral. This gives you peace
of mind knowing that your loved ones will have the financial means
to bury you one day.
provider directly but must pay the amount to you, the insured.
This type of insurance is therefore not the same as a medical aid
scheme.
Retirement Annuity
A Retirement Annuity is like having your own personal pension
scheme. It is a good, safe form of investment because nobody will
ordinarily have access to the funds before the selected maturity
date. Even in the event of insolvency, a Retirement Annuity is
relatively safe. The maturity date may be set anywhere between
the ages of 55 and 70.
1.
Conventional or Fixed-interest Annuities
With a conventional or fixed-interest annuity, you pay in a sum
of money and, in return at maturity of the policy, you are paid
a fixed income every month for the rest of your life. The insurer
takes the responsibility for fluctuations in the market and the risk
that you may live longer than the average person. The advantage
is that your regular monthly income is guaranteed for life. The
disadvantages are that you get the same regular income every
month or year, regardless of inflation rates. Your investment
ceases when you die.
2.
The Living Annuity
With the living annuity, you, and not the insurer, carry both the
investment and mortality risk. In short, the income depends on
the growth of the amount of money invested. The growth of the
money invested depends on the behaviour of the stock market. If
the stock market does well, your investment will increase; if it falls,
your investment will decrease.
3.
Composite Annuities
Composite annuities are a mixture of conventional and living
annuities and to some extent offer the best of both. It provides
you with a flexible income from the living annuity portion and a
guaranteed income (security) from the conventional annuity part.
Disability Cover
You could lose the use of your hands or legs, or suffer from chronic
illness, forcing you to stop working. Disability cover is designed to
cover you in this regard. It is usually added to life cover, but can
also be bought separately. There are mainly two kinds of disability
cover, namely:
1.
Capital Disability Cover
Capital (or lump sum) disability cover can be added to life
insurance. However, it cannot be greater than the amount of life
cover on the policy, e.g. a life cover policy of R450 000 may have
capital disability of any amount up to R450 000 attached to it.
You will only be paid once you provide proof that the disability is
permanent. It can also be added to your endowment policy.
2.
Income Protector Disability Cover
This is an effective risk cover option. One form of the cover provides
a monthly income with annual increases. In effect, if you are
permanently or temporarily disabled, it can replace your full salary
until you recover or die, or the policy matures, whichever comes
first. It is important to discuss these issues with a registered FSP.
Medical Insurance
Medical insurance pays a stated benefit every time you undergo a
medical procedure covered by the insurance policy. The amount
is calculated according to what was done rather than how much
it cost. For example, for an appendix removal operation, a policy
holder may be paid out R12 000, while for a heart transplant, a
policy holder may be paid out R200 000. In the case of medical
insurance, the insurer may not pay doctors or any other service
Hospital Plan
Insurance companies also offer a pure “hospital plan” insurance
policy. This is not as expensive as a medical aid scheme membership.
Payouts are limited to a stated amount, e.g. R300 that you can pay
for every night that you spend in hospital. Paying doctors’ bills and
hospital costs remain your own responsibility, and you may find
that your medical expenses far exceed your hospital plan payout.
It may be helpful to link medical insurance to a hospital plan.
What are your Rights and Responsibilities as a
consumer of insurance products and services?
You have the right to be provided with documents and
information by the financial services provider, including:
• A written quotation, showing all the costs;
• A copy of the policy document, which should be sent to
you within 30 days;
• An explanation on how to submit a claim;
• A statement showing the cost of the insurance, the financial
services provider/intermediary’s commission, and the
physical address and telephone number of the insurance
company.
In addition, know that:
• It is also you right to know what your insurance policy does
not cover. This is called exclusions.
• You are entitled to a grace period which means that if you
miss a payment you should still be covered for that month.
As policies differ, make sure that you know what the grace
period is.
• You have the right to cancel an insurance contract within 30
days after you have signed the contract if you are not happy
with it. This is called a “cooling-off” period.
• The contract must also provide you with the telephone and fax
numbers, physical and e-mail addresses of the Ombudsman
for Long-term Insurance. This is the office where you
complain if your insurance company or the FAIS Ombud
cannot resolve your complaint.
Your responsibilities when entering into an agreement with an
insurance company are as follows:
• Ensure that you deal only with FSP’s that are registered
with the FSB.
• Make sure that the FSP/intermediary is recognised by the
insurance company he/she represents.
• Ask to see the licence of the FSP.
• Read through the entire proposed policy carefully before
signing it. Do not feel rushed to sign. Ask to keep the
document for a few days so that the information contained
can be further explained to you by a knowledgeable person.
• It is your responsibility to ask questions and to ensure that
the FSP answers them in clear and simple language which
you can understand so that you have a clear understanding
of the proposed policy.
• It is your responsibility not to sign an incomplete policy
document or any blank pages it may contain.
• It is your responsibility to keep your policy document in a
safe place.
• Make sure that you know exactly how much the policy will
cost each month and to include it in your monthly budget.
Your contract must state the exact premium you must pay
every month. It must also state on which day of the month
that amount must be paid. The contract must also inform
you how this monthly payment could increase in the future.
Remember, you will not be covered if you stop paying your
monthly premium!
• You have the responsibility to give true and correct
information about yourself and any subsequent claims. You
may experience problems with your claims if it is found that
some of the information provided by you turns out to be
untrue.
Contacts details of institutions relating to Long-term Insurance products and services:
The Ombudsman for Long-Term Insurance
The Ombud for Financial Services Providers (FAIS Ombud)
Private Bag X45, CLAREMONT, 7735
Tel: 0860 324 766
Tel: (021) 657 5000
Fax: (011) 348 3447
Fax: (021) 674 0951
E-mail: [email protected]
Toll-free: 0860 103236
E-mail: [email protected]
The Pension Funds Adjudicator
The Financial Services Board (FSB)
PO Box 23005, CLAREMONT, 7735
PO Box 35655, MENLO PARK, 0102
Physical address: Riverwalk Office Park, Block B,
Johannesburg:
41 Matroosberg Road, Ashlea Gardens Ext 6, MENLO PARK, 0081
Tel: (011) 884 8454; Fax: (011) 884 1144
Toll-free: 0800 20 20 87 or 0800 11 04 43
E-mail: [email protected]
E-mail: [email protected]
Website: www.fsb.co.za
Cape Town:
Tel: (021) 674 0209; Fax: (021) 674 0185
E-mail: [email protected]
1.
You pay a monthly premium and you may receive a lump sum or
a benefit that could be in the form of a funeral. Remember that
you, as the policyholder, can ask for the benefits to be paid in cash
2.
3.
4.
Insolvency -. When a legal entity (company or close corporation) or person can no longer meet their debt obligations on
time as it becomes due, they become insolvent.
Intermediary - A third party who facilitates a deal between two other parties, e.g. a financial services provider or insurance
broker sells an insurance policy to a client on behalf of an insurance company.
Matures/maturity - The end of the term of a policy at which time it pays out a cash benefit at a specific date.
Mortality – The possibility of premature death.
MG0005
Definition of Terms
This is the fifth in a series of articles sponsored by the Financial Services Consumer Education Foundation in the interests of financial literacy.