Life cover, life assurance and funeral cover: the differences SA families miss

Life cover (also called term life insurance) pays a lump sum if you die during the cover term - usually until age 65 or 75. Premiums are level or escalating, and the sum assured can run from a few hundred thousand rand into the tens of millions.

Life assurance is the older South African term for whole-of-life cover with an investment component. Premiums are higher, the policy builds a surrender value, and the cover is designed to pay out at some point - because everyone dies eventually.

Funeral cover is a small assistance benefit (capped at R100,000 per life) designed to fund the funeral itself, with same-week payouts. It is not a substitute for either of the above.

Life cover replaces lost income and settles capital liabilities - bond, vehicle finance, business debt - so the family is not forced to sell assets to make ends meet.

Life assurance is a niche product today. It is sometimes used in estate-planning structures where a guaranteed payout is needed to fund estate duty or buy out a partner under a buy-and-sell agreement.

Funeral cover handles the immediate cash needs in the first 48 hours after death. Most families also use it to cover the parents and in-laws who would otherwise be uninsured.

If a life policy has a nominated beneficiary, the proceeds pay directly to the beneficiary outside the deceased estate. They still form part of the dutiable estate for estate-duty purposes (subject to the Section 4(q) spousal exclusion and various policy-specific deductions in Section 3(3)(a) of the Estate Duty Act), but they do not attract executor's fees.

Without a nominated beneficiary, the proceeds fall into the estate, attract executor's fees, and are paid out only when the estate is wound up - which can be many months later.

Buy-and-sell and key-person policies have their own estate-duty rules under Section 3(3)(a)(iA) - they are excluded from the dutiable estate where strict requirements (premium ownership, written buy-and-sell agreement) are met.

A useful starting point is the sum needed to settle the bond, fund children's schooling and tertiary education, and replace ten years of income for the surviving spouse.

Subtract any existing group-life cover (most employed South Africans have between 2x and 4x annual salary through their pension fund), retirement-fund death benefits, and existing standalone policies.

Run the number against the When I Am Gone liquidity tool if you have access - it surfaces the cash-flow gap an estate would face if you died tomorrow.