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Different types of life insurance.

I often get asked the question: what is the difference between whole of life and term life insurance? There are very important differences that you need to be aware of and how it affects the premium that you pay.

Before we go into the different types, I want to explain the purpose and importance of life insurance. Life insurance is an insurer taking a monthly premium to insure your life. This means that when you die, they will pay out the sum assured indicated on your policy schedule. Most people see this as a grudge purchase as you may pay premiums that increase every year for a long time, and you are not likely to see if it will ever come to the full value. This brings me to the point that the reason you take out life insurance is not for you. It is for the people you care about. Covid-19 highlighted how quickly things can change, and the risk of you dying can change in an instant. It is for that reason, that life insurance plays a valuable foundation of your financial plan. There is no purpose in having a fantastic financial plan creating the future you want for your family, and if you are no longer there, that plan falls flat.

Term life insurance

If you only need insurance for a short period of time, term life insurance may be suitable for your needs. After a period, the life cover will terminate, and you will no longer pay premiums for this. The problem is that after this period, you may not qualify for underwritten life insurance.

Whole of life insurance

If you need your life insurance for a longer period of time, or to make provision for estate costs or assist your family to replace your income when you are no longer there to provide for them, whole of life cover can work in your favour in this instance.

Life insurance should not be viewed as a grudge purchase, but rather part of your financial planning strategy. In most instances, life insurance is probably one of the best returns on your investments, if you structure your insurance correctly.

Want more information?

For more on this topic, you can listen to the eRadio podcast episode 7 here. You can also view the Private Property Podcast where I explain the top three things you need to know about life insurance. You can view that podcast here.

What is a record of advice?

Financial Service Providers must provide you with a record of the advice to detail the advice that they have provided to you. A record of advice is mandatory in terms of the FAIS General Code of Conduct and has a set of minimum requirements.

What is the purpose of a Record of Advice?

The purpose of the record of advice is to have a written record of the advice that you have received and to help you have a summary of why certain products were chosen for your portfolio. When you meet with a financial advisor, you will have to provide them with a mandate of the services you require from them. Ensure that the record of advice reflects that same mandate. For example, if you only approached the financial advisor to help you with your retirement plan or life cover that is a limited mandate. Where you have asked them for a full financial needs analysis, the record of advice should reflect that.

There are many components of financial planning, some more complex than others. As a client, you have the responsibility to ensure that that financial advisor has as much knowledge of your affairs as possible, to provide you with the advice that is most suitable to your needs and the goals that you want to achieve.

The Record of Advice

The first aspect of a record of advice is a brief overview of your circumstances at the time that the financial needs analysis was performed. This will generally include things like your income, where you are in your career, what your goals and financial concerns are. If someone reads this part of the record of advice it should almost contain who you are as a person at that point in time.

The second part must contain the products that were considered before a final selection was made. There are several financial products out there and although many of them have similar features, some might be better in your specific scenario than others, or they could have different pricing structures, which might make you prefer one over the other. This is the reason why financial advisors must consider various products and determine if they are suitable for your needs. Where your financial advisor, only works for a specific company and there were no real other products that they can compare, does not mean this is poor advice, it simply means that they will provide to you will be limited to their scope of the product. In some instances, it might be to your advantage as that they should know that product inside out.

The next part should contain the products that were recommended and implemented. Your financial advisor needs to state clearly why the product was the one most suitable to your needs, what needs it would solve for and what needs it is unable to solve for. There should, at the very least be a list of the features and benefits as well as the consequences of entering the selected financial product(s).

Product Replacements

In the financial services sector, there is a term called “churning”. This means that financial advisors replace existing policies with new ones as soon as the period of commission clawback (usually two years) has been reached. The replacement of one product with another is not always in your best interest and therefore the FSCA has made it compulsory for a Replacement Advice Record to be completed and submitted wherever one product is replaced with another. Some replacement of financial products is warranted, especially where there has been product enhancement or where your circumstances have changed and the product you have no longer meets your needs. The replacement advice record has a prescribed format, and it makes provision for financial advisors to compare the products considering aspects such as the premiums, costs, benefits, exclusions, and waiting periods. The financial advisor also clearly must note why the replacement is more suitable for your needs. As the client, you must ensure that you understand it and that you agree with the reasoning for the replacement before signing the document.

In summary, a financial advisor should always act in the best interest of their client. The 3 is the ultimate document to help both the financial advisor and more importantly, you the client, remember why certain decisions were made, why you have signed up for certain products, and what your situation was at the time. It remains vitally important that, no matter how trusting and fond you are of your financial advisor, you read the documents before you sign them. Make sure that you agree to the contents and lastly, ensure that you get your signed copy from the financial advisor.