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Dear Money Mentor,
I am a relatively newly married beef farmer, myself and my wife have one little girl. My wife is not working outside the home at the moment. We have the farm insured but I am wondering now with my family what type of life cover I should have and at what level.
Thanks
Joe
Dear Joe,
Thank you for your mail. The terms assurance and insurance are often intermingled, but can mean different things, so it is important to understand what they mean for you.
Insurance
Insurance provides financial coverage for unforeseen events or events that may happen, such as fire, theft or flooding.
A farm insurance policy insures the farm to include buildings, machinery, livestock and agricultural produce, basically insuring against loss of any of these items and usually for a specific time.
Farm insurance policies need to be renewed annually. Insurance is taken out to prevent a risk or provide against it happening.
The main objective being to reinstate the financial position in the case of the event actually occurring.
Other examples of insurance would be health insurance or car insurance.
Assurance
Assurance provides cover for events that will occur, such as death.
The objective here is to pay the sum assured only when the event takes place, which is a certainty.
Life assurance provides protection for your next of kin.
An example of assurance is life cover, where the life of a person is assured up to a certain amount and is payable on death of that person to the estate of the deceased.
Life insurance and life assurance
Life insurance and life assurance are both forms of protection designed to pay out after the policy holder or life assured passes away.
The key difference is life insurance will cover the person for a specific term such as five, 10 or 20 years (may also be called term insurance).
Life assurance usually covers the policy holder for their entire life and for that reason is usually referred to as whole-of-life cover.
Life assurance premiums will tend to be more costly than life insurance, due to the fact the payment is guaranteed on death.
Some life assurance polices can be paid out on reaching a certain age, depending on the provider.
Types of policies
There are many types of life insurance policies, such as basic life cover, serious illness cover, income protection cover and mortgage protection cover.
Which type of cover should I choose?
The type and level of cover you require will be based on your own particular circumstances. If you have a mortgage you will need a mortgage protection policy, which will be used to clear the mortgage on death of the policy holders.
The policy holders can be jointly held or a sole policy, depending on the mortgage.
If you wish to provide for your family in the event of your death and wish to protect your financial future, you may consider a whole-of-life policy or an income protection policy. Serious illness cover should also be considered.
How to decide if life assurance or life insurance is the best choice
Both policies pay a lump sum to dependants in the event of death.
However, when deciding which to choose, you should consider what your own goals are before taking out the policy.
Are you providing just enough for your family (such as sufficient to pay off the mortgage or bank loan) or are you protecting their financial future?
Life assurance can be considered more of an investment, as it can be a means of leaving cash to your dependants in a tax-efficient way.
As Joe is married and has one young child, he should consider some type of life assurance to provide for his family in the event of his death.
He should also consider serious illness cover or income protection cover. Joe should contact his accountant or tax consultant to discuss all options.
Review your policies
Everyone should review their life assurance polices regularly, just as you do with your health or farm insurance policies, as circumstances do change.
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