The term ‘Insurance’ refers to protection against an event that might happen, such as a motor accident, a fire or a burglary. This then means that an insurance policy is taken out to prevent a risk or provide cover against a risk, should such an event take place. A risk may be losing one’s house due to a fire. Nobody knows whether a fire will ever occur. But if it does, the insurance company will pay out the sum insured to the insured. If a fire doesn’t occur, the sum insured will never be paid out. It is often referred to as short-term and or general insurance.

The term ‘Assurance’ refers to protection against an event that will definitely happen, such as the end of an individual’s life. In assurance the question is not whether the event (death) will occur, but when the event will occur. The life assured keeps paying the premiums, and when he/she dies, the sum insured will be paid to his/her dependents or the nominated beneficiaries.

In case of an assurance policy, the company pays the amount to the dependants of the person if all the premiums have been paid on time and the person dies within the duration of the policy. In most of the cases, the person does not die within the term of the policy, hence it is called life assurance.

In years gone by this difference between the two terms was very strictly adhered to, but this is no longer the case. It is permissible to speak of ‘insurance’ in all cases. But if the word ‘assurance’ is used, we solely refer to life assurance.

There are many different types of assurance. We will discuss these in following posts:

• Whole Life Assurance
• Whole Life Limited Premium Assurance
• Endowment Assurance
• Limited Premium Endowment Assurance
• Pure Endowment Assurance
• Double Endowment Assurance
• Deferred Whole Life Assurance
• Term Assurance
• Convertible Term Assurance
• Assurance with Reduced Premiums During First Years
• Decreasing Term Assurance
• Reinforced Assurance

The sum insured is payable to the beneficiary or beneficiaries upon the assured’s death or permanent disability. When the sum insured has been paid, the policy comes to an end.

Who should have life insurance?

You should consider getting life insurance if you have dependents who you support financially. This may be a spouse, children, aged parents or disabled family member. Maybe you are assisting with a family member’s tuition fees or have guaranteed a loan. If any of these are true, and you were to pass away unexpectedly, the people you financially support may find themselves in a financial difficulty. If you own any assets, such a house or farm, these might have to be sold in order to pay creditors and/or outstanding taxes. If you have taken out any mortgages, bonds or loans or have any hire-purchase or lease agreements, you need money to settle these.

But not only employed people should have life insurance. If you are a stay at home parent or spouse and cook, clean or care for your children, you are providing a certain lifestyle for your family. If you were to die suddenly, your family would need to make alternative arrangements in order to ensure that their lifestyle would remain the same. This might entail nursery school for toddlers, a nurse for the frail or disabled family member and/or a housekeeper.

Elderly and retired couples also need life assurance to protect the surviving spouse and ensure that funds are not exhausted by unforeseen medical or other expenses.

So in short, you should have life insurance if:

• You support someone financially
• You own property that you\’d like your dependants to keep
• You have any mortgages, loans, HP- or lease agreements
• Anyone depends on you for their well-being

How much cover is enough?

The insurance industry has a formula to calculate the amount of life insurance you need and you can simply go to almost any life insurance company’s website and use their calculator to find out how much life insurance you need.

Some insurance companies say that a basic starting point for life insurance cover is 6 to 10 times the annual salary amount. Another way to calculate your required cover is by taking the amount of your annual income (before tax) and multiply it with the number of years left until you retire. So if you earn R 600 000 a year and you plan to retire in 20 years, you are looking at about R 12 000 000 required by your family should you die today. But, this amount might not a true depiction of their actual future need and one has to take several other things into account, such as:

• rising cost of living
• tuition fees for children
• extra income from spouse
• number of years children will still be dependents

Regardless of how it is calculated, the life insurance cover should be enough to replace the income of the deceased. Or, in other words, the insured amount should be sufficient to replace the income gap and any extra expenses that might be incurred.