The different types of life and disability insurance
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The life insurance market is very different from what it was 50 years ago, with a far wider range of choices for the consumer. Although life cover has not changed to any degree, disability cover has become more complex and varied, and dread disease cover is a relatively new addition to the product range.
The trouble with greater complexity is that it is more difficult for consumers to compare products regarding value for money and suitability.
Group risk versus private cover
If you are permanently employed and belong to a retirement fund, a portion of your retirement fund contribution may go towards group risk cover: life and disability cover for all the employees in your company. The employees are not individually “underwritten”, meaning that each individual is not assessed on his or her particular risks, such as age and health. All employees on the same salary level will pay the same premium, whether they are young or old, healthy or unhealthy.
Group life cover is normally a multiple (for example, three or four times) of your annual salary. It’s likely you will need to supplement your group cover with private individual cover.
Underwritten versus non-underwritten cover
Some insurance companies offer products with no or very little underwriting. You do not have to go for a medical check-up and there is a very short list of questions about your health. This type of cover is often more expensive than a fully-underwritten policy, which requires you to answer a long list of medical questions and to go for a medical examination by a doctor. It may also have more onerous conditions: for example, you may not be able to claim within the first six months. Don’t think that, because you don’t have to go for a medical, you can get away with hoodwinking the insurance company by not being truthful in answering any health questions. If you claim, the insurer will investigate your medical history, and will reject the claim if it finds you did not disclose a serious health condition, such as diabetes or asthma.
Accidental versus comprehensive cover
Accidental cover is far cheaper than comprehensive cover because it only covers you for death or disability as the result of injuries from an accident or other unnatural causes, such as assault or murder. Most people die from natural causes connected with their health, which are not covered under an accident policy. Accidental cover may supplement your comprehensive cover, but it should not be a substitute for it.
This type of cover pays out a lump sum when you die. The payout is made to the beneficiaries named on your policy, such as your spouse and/or children. Life cover is not essential to have if you are young and single, except to cover any debts you may have; it is designed to give families financial protection if the breadwinner is no longer alive to provide for them. However, the older you are when you take out life cover, the higher your premiums will be.
This kicks in if you are temporarily or permanently disabled, through either injury or illness, and you are not able to work. It comes in two forms: lump-sum disability cover, which pays out a lump sum; and income protection cover, which pays a monthly income for the duration of your disability.
Some financial advisers say disability cover is more important than life cover, because the chances of you becoming disabled during your working career are higher than you dying. Unlike life cover, it’s essential to have when you are young and single: you are protecting your future earnings for the rest of your working life.
Disability is typically defined in relation to whether or not you are able to do your job. For example, losing a leg in a car accident will not prevent you from doing your job if you work at a computer, but it will prevent you from doing your job if you are an aerobics instructor.
Dread disease cover
Also known as critical illness cover, this pays out if you contract a life-threatening illness such as heart disease, cancer or stroke. Some policies extend cover to diseases such as multiple sclerosis and Alzheimer’s. The purpose is to supplement your medical cover and to pay for expenses that your medical aid will not cover, such as special equipment you may need. The policy will pay out a percentage of the total sum insured depending on the severity of the disease: for example, it will pay out 25% for stage-1 cancer, increasing to the full 100% at stage 4.
This covers you, and possibly also members of your immediate family, for funeral and related expenses on death. It is normally for a relatively low amount - R100 000 or less - and will pay out quickly, within a couple of days, so that the funeral can proceed. For the amount of cover you get, the premiums are high compared with underwritten life cover, though the latter may take a little longer to pay out. It should not be used as a substitute for life cover.