July 17, 2010
 By Bruce Cameron
Confusion over short-term and long-term insurance often results in policyholders being under-insured or thinking that they have cover when they do not, Dushen Naidoo, Liberty Life's divisional director of product management, says.
An example is the differences between householder's insurance, homeowner's insurance and mortgage bond assurance. The first is on the contents of your home; the second is in case your home is damaged; and the third pays off your outstanding mortgage bond if you die before it is paid off.
Insurance, in the general use of the word, can be divided into indemnity and non-indemnity insurance:
Indemnity insurance covers an actual material loss suffered. The timing of the event that results in the loss is uncertain. You cannot predict, for example, the theft of your car or your house burning down. The event may never happen, but if it does, you are covered with short-term insurance. It is known as short-term insurance because the cover is normally annually renewable and the company can cancel your policy.
An example: You have a vehicle valued at R120 000, which you have insured. You are involved in an accident and the damage to your car will cost R30 000 to repair. The insurer will pay the "actual loss" suffered, which is R30 000. It will not pay the value of your car (R120 000).
You cannot insure the same item twice, even with two different companies, or insure it for more than its value.
Non-indemnity insurance provides assurance against an event that could affect your health or longevity and that could happen at a time that you cannot predict. Non-indemnity insurance is more commonly known as long-term assurance because it is taken out for long periods, to a maximum of the life of the assured person.
Once a policyholder holds an assurance policy and the premiums are paid on the due date, it cannot be cancelled or amended by the life assurance company.
With non-indemnity insurance, the benefit is not necessarily equal to the actual loss you have suffered. For example, you could take out a life policy on your spouse's life. Should your spouse die, you will be paid out an amount - but this will not necessarily equal the financial loss you could suffer as a result of the death.
You can take out assurance with any number of companies for any amount, in excess or less than the financial loss that may be suffered as a consequence of the death of the assured person. The amount/s you choose are subject to you being able to afford the premiums, which are based on what are called underwriting requirements.
Underwriting involves the life assurance company assessing your circumstances to decide whether to provide you with cover and how much to charge you.
In essence, underwriting determines two things: how likely you are to be seriously injured or become chronically ill (for disability, impairment and critical illness assurance) and how likely you are to die prematurely (life assurance).
The shorter the period you pay premiums and the sooner the life assurance company has to pay benefits, the greater the risk it faces.
So, the life assurance company wants to know all about your health, your age, your personal habits (smoking, for example), the riskiness of your job and hobbies, and even your gender. All these factors could affect how soon you could die or are disabled and when a benefit will be payable.
LEGAL REQUIREMENTS
Not everyone can take out an insurance policy of any type. You must have the legal capacity to enter into “a valid and enforceable contract such as an indemnity or non-indemnity insurance policy”, Dushen Naidoo, Liberty Life’s divisional director of product management, says.
Naidoo says any person with legal capacity can enter into a contract of life insurance.
People who do not have contractual capacity or who have limited contractual capacity are:
Minors. A natural person under the age of 18 is considered to be a minor. Minors may enter into policies of insurance only with the assistance of their guardians.
Insolvents. These are people who have been sequestrated or declared insolvent by the court because they cannot pay their debts. Insolvents can enter into policies of insurance only if they have permission to do so by the trustee of their insolvent estate.
People under curatorship. People placed under curatorship by the court because of an inability to manage their financial affairs due to such things as disability and delinquency. A curator bonis is appointed by the court to manage such a person’s finances, which includes entering into policies of insurance.
DIFFERENCE TYPES OF LONG-TERM COVER
There is a wide range of life assurance solutions to cover almost every event that can affect your finances, including death, disability, impairment, critical illness, educating your children and the costs of a funeral.
The main forms of life assurance cover are:
Life cover. This assurance pays an amount to your nominated beneficiary/ies if you, as the life assured, die. The assurance can be for all of your life or part of your life (term assurance). The benefits will provide for your family financially when you are no longer around to support them. The payment can be a lump sum or as a regular income to a nominated beneficiary.
Critical illness or dread disease cover. You receive a lump sum if you are diagnosed with a listed dread disease. The benefit is intended to help pay for medical treatment and other consequences of the disease.
Occupational disability cover. You can choose between a lump sum or a monthly income benefit with assurance that covers you against being unable to work because you are disabled. A lump-sum benefit is paid only if you are permanently disabled.
However, it is important to distinguish between policies that pay a benefit if you are unable to do your particular job and those that pay out only if you can’t work according to a wider definition of employment. Income disability cover pays a monthly income if you are permanently or temporarily disabled and unable to earn a living.
Impairment cover. You are paid a lump sum if you lose a limb or the use of a limb or body function. The amount depends on the severity of the injury and the impact this loss will have on your ability to perform daily functions. Impairment cover is not necessarily linked to your occupation.
Frail-care cover. The aim is to provide you with a monthly income benefit to assist you with the financial burden of suffering from an impairment in your later years.
Funeral cover. Pays a lump sum to a nominated beneficiary to cover funeral costs. The cover is often for one or more members of a family.
Education cover. Provides for the ongoing education of children in the event of their parents’ death or permanent disability.
Financial protection. This cover offers a savings benefit that can be used to protect a contract (for example, a lease) in periods of temporary financial difficulty.
Credit life assurance. This assurance pays a particular debt you may have if you die, are disabled or even retrenched from your job in some cases.
Premium protection/waiver. This cover pays assurance premiums to ensure that you and your family remain covered if anything happens to you.
Future protection/future assurability. This benefit ensures that you will not be denied cover in the future by giving you the option now to choose the amount of cover you may need in the future, without having to undergo any further medical examinations (excluding tests for HIV/Aids).
INSURABLE INTEREST
You can take out assurance on other people, but you must have what is called an insurable interest. This means an interest must exist between the policyholder (yourself) and the life assured.
Dushen Naidoo of Liberty Life says that without the principle of insurable interest, we could insure anyone we wanted to and expect to be paid whatever amount we had chosen when he or she died.
Insurable interest is what distinguishes an assurance policy from a bet or wager. Without it, in extreme cases, the unscrupulous could abuse the system to bump someone off.
There can be four parties to a contract of assurance:
The life assurance company.
The policyholder, who takes out the policy and is contracted to pay the premiums.
The life assured. This can be the policyholder or someone else. If it is someone else, what is called an insurable interest must exist. An insurable interest is where the policyholder would suffer some financial loss should the life assured die or become disabled (for example, a spouse or partner). Insurable interest needs to be present when the life insurance policy is issued. The insurable interest need not apply when the life assured dies.
The person (or people) who receives (or receive) the benefits of a policy. The beneficiary does not have to have an insurable interest in the life assured.
Naidoo says examples of where an insurable interest exists are:
A permanent relationship between spouses, common law partners and even engaged couples.
A person that is legally entitled to financial support from a family member.
A creditor, on the life of a debtor, for an amount that is not greater than the debt.
A contractual arrangement in which one person stands to benefit from the life of another. Business partners have an insurable interest on each other’s lives. Shareholders in a company have an insurable interest on the lives of their fellow shareholders. The same applies to members of a close corporation.
An employer that has entered into an agreement with an employee in terms of which the employee has agreed to work for the employer for a certain number of years at an agreed rate. The employer has an insurable interest on the life of the employee that equals the value of the work done by the employee during his or her years of service.
  
 
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