This post discusses life assurance and types of life assurance policies.

WHAT IS LIFE INSURANCE?

Life insurance is a contract between two parties (i.e., the assured and the life insurance company) whereby the insurance company undertake to pay a lump sum to a beneficiary specified by the insured in the event of their death in exchange for payment of a consideration known as the premium. A life insurance policy can be purchased to provide payment for a specified time (e.g., term assurance) or throughout the lifetime of the assured person (e.g., whole life assurance). There are different types and forms of life assurance policies.

DIFFERENCE BETWEEN LIFE INSURANCE AND LIFE ASSURANCE

Both life assurance and life insurance can provide valuable peace of mind that the dependant or appointed beneficiary will receive a lump sum in the event of the death of the life assured. This can be used to pay the mortgage and meet other essential needs. The main difference between life assurance and life insurance is that life insurance covers the life assured for a specified term, e.g., 10 or 20 years. In contrast, life assurance covers the life assured for its whole life, and the agreed benefits will be paid after the death of the life assured.

Life assurance policies offer insurance cover for the whole life rather than a chosen policy length. The premium for life insurance is lower compared to life assurance. Likewise, the sum assured of life insurance is lower than lie assurance. Life insurance cover has protection content, but life assurance cover has both protection and investment content.

HOW LIFE ASSURANCE POLICIES ARE WRITTEN

Life assurance policies are written on three significant bases: 

1) Single-life policies – cover only one life.

2) Joint life policies – cover two assured, e.g., husband and wife. There are two basic kinds of joint life policy: first death and second death. 

3) Group life assurances – more than two assured persons.

JOINT LIFE FIRST DEATH POLICY

A joint life first death policy pays on the death of the first life assured to die. This policy can be used for family protection and house purchase arrangements.

JOINT LIFE SECOND DEATH POLICY

A joint life second death policy pays on the death of the second life assured to die. This policy is sometimes called the joint-life last-survivor contract. This kind of policy can be used for inheritance tax planning and investment purposes.

Joint life first-death policy is more expensive than a joint-life second-death policy because the death risk is higher, and the death claim is payable earlier.

GROUP LIFE ASSURANCE

Group life assurance is a life policy that provides death-in-service benefits to employees in common employment or a group of people under appreciable similar exposure. It is designed to provide for the payment of a lump sum of money to the beneficiary or beneficiaries of a deceased scheme member.

BASIC TYPES OF LIFE POLICIES

There are four basic types of life assurance policies:

• Term assurance,

• Whole life assurance,

• Endowment assurance, and

• Universal life insurance.

TERM ASSURANCE

Term assurance is a basic form of life assurance that covers pure protection with no investment element. This is because payment is made only if the life assured dies during the policy term, and no payment is made if the life assured survives the term. On the other hand, there is an investment element in whole life and endowment contracts; hence, payment is certain under both contracts.

TYPES OF TERM ASSURANCE POLICIES

There are various forms of term assurance, including:

1. Level Term Assurance,

2. Renewable Term Assurance,

3. Convertible Term Assurance,

4. Decreasing Term Assurance,

5. Increasing Term Assurance,

6. Family Income Policies,

7. Increasing Family Income Policies, and

8. Unit-linked Term Assurance.

WHOLE LIFE POLICIES

A whole life policy pays on the death of the life assured whenever that occurs. An endowment policy will pay on the maturity date or earlier death of the life assured. Under a term assurance contract, a payout is possible but not certain. Payment is made only if the life assured dies during the policy term, and no payment is made if the life assured survives.

A whole life policy differs from a term life insurance policy, which protects for a specified period. Provided the required premium is paid, a whole life policy guarantees payment of a lump sum to the policyholder’s family or beneficiaries. The policyholder pays a level premium – which usually does not increase with age. Whole life policy premiums are fixed based on the age of the issue. The policyholder typically pays premiums until death, except for limited pay policies, which may be paid up in 10 years, 20 years, or at age 65.

A whole life policy provides cover for the life assured entire lifetime (whole life), payable after the policyholder’s death. Consequently, whole life contracts can be used: 

1) As collateral security for a loan from either the life office or another firm; 

2) To provide for funeral expenses; and 

3) For estate planning.

TYPES OF WHOLE LIFE POLICIES

There are several types of whole life policies. The basic types of whole life policies include:

1) Non-Profit (Without-Profit) Whole Life Policies,

2) With-Profit Whole Life Policies,

3) Low-Cost Whole Life Policies, and

4) Single Premium Unit-Linked Whole Life Policies.

ENDOWMENT POLICIES

With endowment insurance, as with term life insurance, the focus is on the length of the policy’s terms, usually 10 to 20 years. An endowment policy provides for payment of the sum assured on a specified date (maturity date) or earlier death of the life assured. If the insured dies before the endowment’s maturity, the policy’s face value – the “death benefit” – is paid in a lump sum to the appointed beneficiaries.

However, if the insured is still alive at an endowment’s maturity, the lump sum or the face value will be paid to the policyholder. Level premiums are paid for the duration of the contract. There will certainly be a payout out at some stage. Premiums for endowments are generally more expensive than whole life assurances because claim payments are generally made earlier.

TYPES OF ENDOWMENT POLICIES

There are several types of endowment policies. The basic types of endowment policies include:

1. Non-Profit Endowments,

2. With-Profit Endowments,

3. Low-Cost Endowments,

4. Low-Start Endowments, and

5. Unit-Linked Endowments.

UNIVERSAL LIFE INSURANCE

Universal life insurance is a permanent life insurance policy and is considered one of the most flexible because you can adjust the premium and death benefit (within limitations) after the policy is in force. Universal life insurance shares the same basic components as whole life insurance (i.e., a cash value) but may offer more options. For this policy type, the cash value’s underlying rate of accumulation will be adjusted according to financial market trends but with a guaranteed minimum interest rate. Universal life may have lower premiums for the same death benefit amount than the whole life. However, the underlying cost of the actual life insurance coverage will rise over time, unlike with whole life policies.

It accumulates cash value and comes with investment options. There are two basic types of universal life insurance: 

1. Variable universal life insurance, and 

2. Indexed universal life insurance. 

Variable universal life insurance is similar to an indexed universal life insurance policy. The primary difference is that you invest the cash value in grouped investments like mutual funds. Indexed universal life insurance has many of the same characteristics as a standard universal life insurance policy, except that the cash value’s growth is tied to the performance of an index.

LIFE ASSURANCE POLICIES INVESTMENT CONTENT

Life assurance policies (including Whole life, endowment, and universal policies) could have an investment content that implies that the premium paid by policyholders can be invested, partly or wholly, in interest-yielding investments.

FORMS OF LIFE ASSURANCE CONTRACTS

Life assurance policies may be without-profit and with-profit. These policies may be whole life and endowment contracts.

1) WITHOUT-PROFIT LIFE ASSURANCE CONTRACTS

A without-profit policy is a life insurance policy that stipulates that the insurance company will not distribute any parts of its profits to the policy owner. Without-profit, also known as non-profit or non-participating policy, offers only payment of a guaranteed sum. 

2) WITH-PROFIT LIFE ASSURANCE CONTRACTS

With-profit whole life and endowment policies have investment elements. With-profit life assurance policies offer returns linked to the life office’s investment performance – i.e., the investment returns.

Life assurance policies can secure investment returns from the life offices’ profits or good investment performance in two ways: 

1. With-profit policies; and 

2. Unit-linked policies.

OPERATIONS OF LIFE OFFICES BONUS SYSTEM

There are two kinds of bonuses: normal and terminal. Some life offices operate a system using both normal and terminal bonuses. Hence, the amount payable (i.e., the policy proceed) depends on three elements: 

1) Sum assured,

2) Normal bonus, and 

3) Terminal bonus. 

See the full video on Insurance Claims: https://youtu.be/ZjnDQCPzWCo