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Cancel your life insurance or funeral policy and you won’t get any money back, including the premiums you paid. This is because insurance policies are risk products, not savings and investments products, and don’t have a cash value. We take a look at the differences between insurance or risk policies and savings and investments, and why your insurance policy is so important to you and your family.
Why you won't get money back: The difference between risk and investment products
Investments and savings, and insurance products, are two very different financial products that sometimes get confused! In fact, 40% of South Africans say they do not understand their insurance policies. Let’s look at the difference between these two types of products.
Top tip: If you want to learn more about insurance and investment products and how they can help you build wealth, apply for the Truth About Money’s financial education course.
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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, that could include 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 larger lump sum than funeral cover, so that the family can continue with their current lifestyle, 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 and risk of you dying, during the term of your contract with your insurer.
Savings and investments
These products are designed to grow your money, and you can decide how much you want to invest and when you want to withdraw all or part of your investment. For example, you invest R500 a month in a unit trust fund for 5 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.
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 an additional premium of R50 for a cashback benefit that pays out 30% of premiums in 10 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 save or invest the extra funds elsewhere.
You can read more about the truth about cashbacks in this blog.
Keep it simple
The world of money and financial products can become very complicated. Insurance, and savings and investment products are different and offer different propositions. 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, and even grow their wealth, and/or pay for a funeral and gathering.
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
