15 terms to help you understand life insurance

While life insurance is a necessity for most professionals, many struggle to understand certain terms used by the industry. This often leads to people not understanding their products and the different circumstances they are covered for. Improving your financial literacy will go a long way towards understanding your cover.

Now you probably know that your policy refers to the actual contract you have with your insurer, and your premium is the money you pay in return for the cover you receive. But if you need help beyond that - don't worry. Here's a breakdown of 15 commonly used terms.

15 terms to improve your financial literacy

1. Policy schedule - The policy schedule is a document that shows all the details of your cover, as well as your personal details. This is a very important document that you need to study to make sure you have enough cover for your personal circumstances.
2. Rating - Insurance companies base premiums on the level of risk they accept. Life insurers rate each client's risk and base their premiums on the rating. Factors that influence your rating include age, gender, income, education level, occupation and whether or not you smoke.
3. Underwriting - Underwriting is the process your insurer uses to determine your risk and your premium.
4. Loading - A loading is an amount added to your premium for any increased risk you may have. For example, you may have to pay a premium loading if you take part in dangerous hobbies such as skydiving.
5. Dependant - A dependant is a person who relies on you for financial support, for example, your spouse or children.
6. Beneficiary - A beneficiary is a person you choose to receive the payout from your life insurance in the case of your death. Family members are typically chosen as beneficiaries, but you can choose anyone you want, and you can choose more than one person.
7. Exclusion - An exclusion is something that is specifically not covered by your insurance policy. For example, many life insurers exclude suicide for a certain period after cover has started.
8. Cede/cession - When you cede your policy to a third party, it means that the third party will receive any payout from your policy. For example, you may have to cede your policy to your bank to qualify for a home loan. There are two types of cessions, each with its own implications. Talk to your financial adviser to understand how ceding might affect you.
9. Annual benefit increase - Your cover will increase by a certain percentage every year; this percentage is known as the annual benefit increase. Your annual benefit increase ensures that your cover stays relevant and up to date.
10. Annual premium increase - Your premium will increase by a certain percentage every year; this percentage is known as the annual premium increase. Your annual premium increase ensures that your premium stays in line with your annual benefit increase.
11. Accelerator (rider) benefits - Initially, life insurers only offered death benefits. But as the industry evolved, extra benefits - such as disability benefits - were added. Accelerator benefits typically accelerate (reduce) the death benefit and other benefits they are linked to. Any claim under such a benefit reduces the total of your life cover and renewable life cover under the policy by the amount of the claim. For example, if you have a death benefit of R1 000 000 and your insurer pays out R200 000 for a disability claim, the remaining death benefit would be R800 000. Accelerated benefits cost less than their equivalent non-accelerated benefits.
12. Non-accelerated or standalone benefits - Non-accelerated benefits don't require Life Cover to be in place and do not reduce the Life Cover and Renewable Life Cover on claim. Such standalone benefits function independently from other benefits. They can be sold along with other benefits, but are also available separately.
13. Waiting periods - A waiting period is the time that must pass before your cover comes into effect. 
14. Survival periods - Some benefits have survival periods. When you submit a claim for one of these benefits, you will need to survive for a certain period of time before the insurer pays out for the claim. This is to ensure that if you are still alive, you'll have financial assistances so you can adjust to any lifestyle changes you may have. It also ensures that only valid claims are paid out.
15. Elimination periods - Disability and severe illness benefits often use an elimination period. This is the time that passes between the illness or disability starting and the beginning of the claim payment. Elimination periods are also used to identify the nature of a claim or to differentiate between short-term disability and illness claims.

This article is meant for information purposes only and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser. Terms, conditions and product rules apply. Discovery Life Limited: Registration number 1966/003901/06, is a registered long-term insurer, and an authorised financial services and registered credit provider, NCR Reg No. NCRCP3555.