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Financial terminology: Know the difference between these key concepts

Do you know what is the difference between an heir and a legatee?

Financial planning terminology can be difficult to navigate, especially to the person in the street. What is the difference between an heir and a legatee? Is medical aid the same as medical insurance? How is the difference between disability and impairment determined? Let’s have a closer look at some potentially confusing concepts.

Life annuity versus living annuity

A life annuity is an insurance contract that promises to pay the pensioner for as long as he lives, which means that the longevity risk is borne by the insurer. On the other hand, a living annuity is a lump sum from your retirement fund which is invested into a unit trust platform in the pensioner’s name. In the case of a life annuity, the retiree is the owner of the policy and the insurance company takes on the investment risk. When the pensioner dies, the life annuity dies with him meaning there will be no benefit for his heirs. With a living annuity, the investor bears the investment, inflation and longevity risks, although the investor is able to choose their own investment strategy in line with their financial goals. When the pensioner dies, whatever is left in his living annuity can be bequeathed to his heirs.

Whole versus term life

Term life insurance is a policy that covers you for a pre-determined length of time, such as ten, fifteen or twenty years. Because there is uncertainty as to whether you will claim against a term life policy, the premiums tend to be more cost-effective. Generally, people tend to use term life cover to protect them while they are accumulating their net wealth or to insure their lives during the term of their home loan. On the other hand, whole life cover insures you until the day you die. With whole life insurance, your death is inevitable and there is a 100% chance that the policy will pay out at some point. As a result, the premiums are generally higher. Both whole life and term assurance allow you to nominate your beneficiaries.

ETF versus tracker fund

Exchange-Traded Funds (ETFs) and tracker funds are both passive investing vehicles. Tracker funds are managed by investment managers and are specifically designed to track or replicate a particular market index. On the other hand, ETFs are traded on a stock exchange by the individual investor. ETFs are baskets of shares based on a certain market index which investors can buy and sell like any other share on the stock exchange. In the case of tracker funds, the investor would need to open an account with the investment manager, whereas in the case of ETFs the investor either needs to open an account with a stockbroker or make use of an investment platform such as Satrix.

Inter-vivos versus testamentary trust

An inter-vivos trust is a trust that is set up during the lifetime of the individual whereas a testamentary trust is set up in terms of one’s will and only comes into being on the death of the testator. An inter-vivos trust is often used to house assets for tax and estate planning purposes, allowing assets in the trust to grow without causing higher estate duty for the person’s estate. Such trusts may operate indefinitely, even after the death of the person setting up the trust. Trustees of a testamentary trust are bound to manage the trusts in the best interest of its beneficiary until he/she reaches the stipulated age. Once the beneficiary reaches a pre-determined age, the testamentary is usually terminated.

Disability versus functional impairment

Traditional disability assurance is based on whether or not you are physically able to work. Occupational Disability assurance is generally divided into (a) own occupation, (b) own or similar occupation or (c) any occupation. These definitions will determine whether you will be paid out if you can no longer perform your nominated profession, your own or similar profession, or if you are unable to perform any job at all. On the other hand, Functional Impairment pays a lump-sum benefit on the occurrence of a pre-defined event that limits your ability to carry out physical functions. Criteria for the payment of benefits are based on the level of illness or impairment, defined in medical terms. Whether you can work or not is not a deciding factor. Functional Impairment benefits are tiered and take into account the importance of the body part you can no longer use, bearing in mind that the impairment must be permanent. To measure Functional Impairment, consideration is given to your ability to perform daily activities. Generally, a Functional Impairment policy will pay a percentage of the amount for which you are insured, depending on the severity. Impairment products are list-based products which means that if your particular impairment is not on the pre-determined list, you will not qualify for a claim.

Heir versus legatee

Beneficiaries are people who inherit from a deceased person and generally include heirs and legatees. An heir is able to inherit from a person via testate or intestate succession, whereas a legatee is only able to inherit in terms of a valid will. In other words, it is not possible for a legatee to exist where the deceased died intestate. After the estate debts are paid, the executor must pay the legatee first. An heir is able to inherit the entire inheritance, a proportion of it or a particular part of it. On the other hand, a legatee is not a recognised heir in terms of intestate succession. For instance, if you may make a special bequest in your will to leave money to your best friend, your best friend will be a legatee of your will.

Money market fund versus money market account

A Money Market Account is held by a bank and can include a call deposit account, overnight call account or savings account. It is similar to a normal bank account but generally pays a higher interest rate. On the other hand, a Money Market Fund is offered by various investment managers in a regulated investment vehicle such as a unit trust. Your money is invested in various money market instruments and is not limited to a single bank as in the case of a money market account.

Medical aid versus medical insurance

Medical Aid is governed by the Council for Medical Schemes and is designed to pay for medical treatment in accordance with a specific medical scheme tariff. Importantly, it is not an insurance product. Medical Insurance, on the other hand, is an insurance product and payouts are not based on any medical tariff. Generally, Medical Insurance pays out a set amount for each day spent in the hospital – regardless of the condition, procedure or the cost of treatment. In the case of Medical Aid, the scheme will pay the hospital and/or service provider directly for the treatment. With Medical Insurance, the insured must claim directly from the insurer and is responsible for settling his own accounts. He is not required to use the money for his medical bills – he can spend the money as he wishes.

Living Will versus Advance Directive

An Advance Directive is similar to a Living Will in that it expresses your wishes for future medical treatment if there ever comes a time when you are unable to communicate. Both a Living Will and an Advance Directive only become effective when you lose the ability to communicate for yourself and can provide detailed instructions on what medical treatment you do and do not consent to in various scenarios. The key difference between the two documents is that an Advance Directive enables you to appoint a medical proxy, normally a partner or close family member, who will make decisions on your behalf if you are incapacitated. Generally speaking, a Living Will expresses a person’s wishes not to be kept alive artificially where there is no hope of recovery and where death is inevitable. An Advance Directive, which includes the appointment of a medical proxy, often provides more specific details regarding treatments, medical interventions, pain management, infection control and palliative care at the end-of-life stage.

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Eric Jordaan

Crue Invest (Pty) Ltd

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