If I Insure My Life For A Short Period Of Time, Why Is It Called Long Term Insurance?

Do you have a couple of insurance premiums running off your bank account each month? You might be spending a few hundred bucks a month on life cover, funeral insurance, a policy to cover your car and household goods, and medical aid on top of it all. Did you know that insurance policies fall into different categories? In this blog post we are going to discuss the differences between short and long-term insurance policies, and if your medical aid is considered insurance at all? Remember, the more you know about insurance, the better decisions you can make.

 The concept of risk transfer

This is probably a good place to start. Before we move onto the types of insurance, defining the term insurance is a logical starting point. Insurance is simply the transfer of risk. You transfer your risk of loss to an insurer, and you pay a premium to have that risk insured. The greater the risk, the more you pay to insure it.

What types of risk are we talking about here? Here are a few examples:

  • It could be the risk of landing up in hospital without having enough money to pay the bills.
  • It could be the risk of dying, while owing a lot of money on your bond.
  • It could be the risk of crashing your car, while still owing the bank a whack of cash.

The ‘transfer of risk’ idea is enough to understand, but are there any specific differences between types of insurances?

Insurance can be divided into two basic categories:

  • Short-term insurance
  • Long-term insurance

And within each category there are several different types of insurance policies you are probably familiar with.

What’s the difference between short and long-term insurance?

If there is one thing you need to take away from this blog post, it’s this:

  • With short-term insurance you are covering possessions..
  • When you are insuring a life, it’s deemed to be long-term insurance.
  • And your medical aid is governed by the Medical Schemes Act

Let’s look at a few examples to make this a little clearer:

Nosipho has just bought a new car and before driving it off the dealership floor she needs to insure it. Until she pays off the car (over 5 years), it actually belongs to the bank and insurance is mandatory. The car insurance policy, put in place, will fall into the category of “short-term” insurance for two reasons:

  1. The possession being covered (the car) is being insured for a short period of time.
  2. The possession being insured is not a life.

Remember that with any type of insurance cover, you are covering either a specific item or a specific eventuality for a period of time. If it’s a life, it’s considered “long-term” insurance regardless of the time period.

Here is another example:

Thabo calls in an insurance consultant because he needs to insure his life.

Thabo takes out a life insurance policy, which will pay out a specified amount of money, to his wife, when he passes away. This is long-term insurance, with Thabo himself being the life insured, and his death being the eventuality.

At the same time Thabo decided to take out a 10 year endowment policy for his kid’s education. This is a fixed term investment. The endowment savings policy is taken out through the same life insurance company and is also deemed to be a long-term insurance product because Thabo is the insured life (a natural person) and again, because of the nature of the investment, there is a long fixed premium paying term involved.

So even though the endowment policy is an investment through a life insurance company, and Thabo is not actually insuring his life, it’s still long-term insurance. That’s because it involves Thabo as being the insured person, and should he pass away the accumulated monies, in the investment, will pay out to the nominated beneficiary on the policy.

And what about my medical aid?

Your medical aid is insurance cover in the true definition of insurance  –  You are transferring the risk of landing up in hospital and not being able to afford the private hospital bills, to a medical scheme in exchange for a monthly contribution (just like all the other members on the scheme). The only difference is that a medical aid is actually governed by a completely separate piece of legislation called the Medical Schemes Act. The Act makes a whole bunch of provisions for how schemes need to run, that completely sits outside the scope of short and long-term insurance policies.

In closing

  • If you are insuring a life, it’s long-term insurance
  • If you are insuring a possession, its short-term insurance (regardless of the length of time)
  • If you belong to a medical scheme, it’s neither short nor long-term insurance, but rather a medical scheme membership which is governed by the Medical Schemes Act

Until next time.
The Wise About Life team.

Leave a Reply

Your email address will not be published. Required fields are marked *

Be Wise - Find your ideal plan with Stangen

We understand that you want to make wise choices that suit you. Use our cover calculator to easily get an idea of your cover requirements.

Need assistance? We'll call you back.

Why not subscribe?

What can you expect from us? We promise to keep content on this site relevant and useful so that you can make wise money choices.
Every time we knock out another great piece of “stay financially wise” content, we will send you a notification via email.