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Managing your money can be confusing, especially when it comes to understanding the different types of financial products. Take insurance, for example. Did you know that if you cancel an insurance policy you won't get your premiums back? This is because insurance policies are risk products, not savings or investment products, and don’t have a cash value. In this guide, we explain the differences between the two.
Insurance or ‘risk’ products
Insurance products are designed to protect you against financial losses. In return for a premium, your insurer agrees to reimburse you for these losses, such as theft, damage or death. For example, life insurance protects against the loss of income from a breadwinner in the family and pays a beneficiary a lump sum so that the family can maintain their standard of living when the breadwinner (life assured) passes and a valid claim is made. If you cancel your policy, you won't get your premiums back because these are the ‘fees’ that you paid for financial protection during the term of your contract with your insurer.
Savings and investments
These products are designed to grow your money. You decide how much to invest and when to withdraw all or part of your investment. For example, you invest R500 a month in a unit trust fund for five years. You can withdraw all or part of the value of your funds at any time and get your money back, minus any fees and penalties you might incur for early withdrawal.
Top tip! Want to learn more? Sign up for the Truth About Money’s free Financial Independence course. It’s an in-depth 8-hour course that covers the basic principles of successful money management and wealth building.
What about so-called ‘cashbacks’ on insurance policies?
Some insurers offer cashback benefits on their policies. For example, an insurer offers life cover for a premium of R500, plus R50 extra for a cashback benefit that pays out 30% of premiums after ten years. But there is no such thing as a free lunch. Policyholders are paying an additional premium for the cashback in 10 years and there is no guarantee that you will get the cashback if you cancel the policy!
A better alternative is to pay the premium for cover only, and invest the extra funds elsewhere.
Keep it simple
The world of money and financial products can become very complicated. Insurance and investment products offer different benefits. Insurance pays valid claims, investments grow wealth and can be withdrawn at any time. The value of your insurance policy is that your family will have funds when you pass so they can maintain their standard of living, grow their wealth or cover funeral expenses.
Quick guide explaining the differences between life cover, funeral cover and investments
Funeral cover
- Protects against unexpected funeral expenses
- Multiple family members can be added to a policy
- The pay-out is intended to pay for a respectable funeral
- Sum assured of up to R50 000 per member on 1Life funeral policies
- Pay-out is tax free
- Premiums must be paid each month
- No cash value
Life cover
- Protect against the loss of income of a breadwinner
- Covers one person per policy
- Pay-outs are intended to give financial security to family members who relied on the life assured for financial and other support
- Sum assured of up to R12 million on 1Life life policies
- Pay-out is tax free
- Premiums must be paid each month
- No cash value
Savings and investments
- Products are designed to grow your money
- You can choose how much and when to invest
- You can stop contributing at any time
- You can cash in or withdraw your investment
- Your investment and any returns may be taxed
- There are investment fees, which can reduce your investment return