What is Life Insurance? A Complete Guide for All South Africans

Life insurance can be confusing. Policies, premiums, underwriting, and exclusions – it’s no wonder you could feel lost.

At AllLife, we believe life insurance should be simple, straightforward, and available to everyone, regardless of medical conditions. This comprehensive guide will help you understand:

• What life insurance is
• How it works
• Why is life cover beneficial?
• Who should have life insurance?
• How to claim
• Pros and cons of tax
• How much cover do you need?
  

The Definition of Life Insurance

Life insurance (also known as life cover) is a type of insurance that pays a tax-free lump sum payout to your nominated beneficiaries if you pass away while the policy is active.

In short:

You pay a premium each month.
Should you pass away during the policy term, your beneficiaries will receive the agreed lump sum payout, and a life insurance policy is intended to provide financial support to your loved ones upon your passing.

What can Life Cover be used for?

Many South African families are supported by one main income earner. Life cover ensures that your financial obligations are still taken care of, even if you are no longer there to support your family. The lump sum from your policy can be used by your beneficiaries to cover immediate expenses. The lump sum payout could cover costs such as:

• Funeral costs
• Home loan or bond repayments
• Car loan
• Credit card or personal loans
• Household expenses
• School or university fees
• Ongoing income replacement

You see, your loved ones can decide how they use the cash payout from your life insurance policy.

How Does Life Insurance Work?

Step 1: You Apply for Cover
With AllLife it is really simple. Just provide us with your contact details, and we will call you.   Our trained consultants will discuss the options available to you. Whether you are in perfect health or living with chronic conditions such as diabetes, HIV, cancer, or heart disease, you can also qualify because if your health condition is properly managed, you should not be excluded from protecting your family.

Step 2: Underwriting (Risk Assessment)
The insurer evaluates various factors such as your:

• Age
• Health status
• Medical history
• Lifestyle habits
• Smoking status
• Occupation and possibly a few others

If you live with one or more chronic conditions with the Chronic Life Plan from AllLife, you are guaranteed Life Cover up to R3 million without any medical questions.

 Underwriting also takes into account how well your conditions are managed, not just that you have a condition. You will have to undergo a few medical tests as part of this assessment, but you can qualify for up to R10 million in life cover. Now that seems worth it!

Step 3: You Pay Monthly Premiums
Your premium is the monthly amount you pay to keep your policy active.

As long as you pay your premiums on time and adhere to the terms of your policy, your cover remains in effect.

Step 4: Claim and Payout

If you pass away while your policy is active:

• Your beneficiary or beneficiaries file a claim.
• They need to submit all the necessary documents (one of which would be the death certificate) in order for the claim to be processed. 
• Once approved, the lump sum payout is made to the beneficiaries. The time it takes to receive the payout will vary.

Are there any Tax Benefits?

The short answer is Yes and No.

Downside

It is important to note that the premiums paid are not tax-deductible in South Africa. While there are other expenses that you can claim to reduce your taxable income, the premiums paid towards your life insurance policy are not one of them. However, there is an upside that is worth your attention.

Upside

The tax benefits of a life insurance policy lie in the payout of the life insurance policy. While you may not be getting any tax benefits at this point, your beneficiaries definitely will. As of March 2023, the amount paid out to your beneficiaries at the time of your death is tax-free. This means that the entire amount goes directly to them, without any part of it being taken away by the taxman. This is a huge benefit that ensures that your loved ones receive the entire amount that you have worked so hard to save.

As far as SARS is concerned, things do change, and the tax treatment for life insurance policies today may not be the same tomorrow, so always make sure that you are updated on the new tax treatment and continue to communicate with your financial advisor.

What Happens if I Miss a Premium?

If you miss a premium payment, you may have a grace period to pay it. If not paid within the grace period, your policy may lapse. If your policy lapses, you may have to reapply, possibly at a higher premium. So it is essential to keep your premiums paid to maintain your cover.

When Does Life Insurance Not Pay Out?

Life insurance does not pay out in the following circumstances: If you failed to disclose important medical information during the application process. If the policy was not active (lapsed due to non-payment) or if death occurred within certain exclusion periods (as stipulated in the policy terms). 

You have to make sure that you read the terms and conditions of your life policy, so that you are familiar with all the scenarios that may impact the payout of your policy.  

It is important to be truthful during the application process. Failure to disclose information may result in a claim being rejected, leaving your loved ones without the insurance you want them to have.

Who Should I Nominate as a Beneficiary?

This is entirely up to you. Typically, spouses or partners, children, parents, siblings or a trusted friend are nominated, but you could also nominate a charity of your choice. Ensuring that your beneficiary information remains up to date so that the payment goes exactly to whom you want it to go.

Another benefit of having Life Cover with AllLife is that you can nominate as many beneficiaries as you would like.

It is super important that you name your beneficiary/ies; otherwise, the lump sum payout will become part of your estate, and then the funds will not be accessible immediately.

How Long Does It Take to Pay a Claim?

Once all necessary documentation is received and processed, claims are paid as quickly as possible. Only in the event of incomplete documentation will there be a delay.

How Much Life Insurance Do I Really Need?

If you have people who rely on you financially, life insurance is a must. The difficult part is deciding how much cover is enough. The right amount depends on the financial support your family would need to manage future costs and commitments if your income were no longer there to support them.

For example: 

Some people follow the 10 to 15 times annual salary calculation, but that is entirely up to you. It also depends on your outstanding debts and the number of dependents.

You should take into account:

• Outstanding personal loans
• Credit card debt
• Number of dependents
• Future educational costs
• Monthly living costs
• Bond repayments
• Car loans
• Inflation

Here is a simple example:
If you earn R400,000 per year and have a bond and two children, you may need R4-6 million worth of cover to provide your family with sufficient protection. The choice is yours.

Why Life Insurance is Especially Important if You Have a Medical Condition

Many people living with chronic illnesses believe that they will not qualify for a life insurance policy. This leaves their families vulnerable to financial hardship when they pass away. AllLife believes that everyone deserves the right to be insured so that their families can live comfortably when you are not there to support them.  

Key Takeaways

Life insurance helps you to fulfil a promise to your loved ones, even if you’re no longer around.

Ready to Secure Your Loved Ones?

If you have dependents, debt, or financial obligations, then the time to act is now. Leave your details, and we will call you back.  

AllLife (Pty) Ltd is an Authorised Financial Services Provider, FSP No 4946. Insured by OMART, a Licensed Life Insurer.

Sources

TaxTim. (2023, October 5). *How does tax work on a life insurance policy in South Africa | TaxTim Blog SA*. TaxTim. 

https://www.taxtim.com/za/blog/how-does-tax-work-on-a-life-insurance-policy-in-south-africa