As a practitioner, I know that people often get so confused in the maze of life insurance products that are available in the markets. Traditionally, all life insurance products fall within two broad categories. These are called “Term Assurances” and “Permanent Life Assurances.”
Life offices have designed and customized so many products to the extent that practitioners themselves do get quite overwhelmed when it comes to categorization. Technology has also contributed immensely to the level of product innovations that are being introduced these days.
But I will try to make things easier in this post by simply grouping life insurance products into four classes. As wide as the array of available products is, it is still very much easy to categorize them into the following:
1. Term Assurance
2. Whole Life Assurance
3. Endowment Assurance
Let’s run through them in turn.
1. Term Assurance
As the name suggests, term assurance is a temporary life insurance policy usually arranged for a specific period, and for a specific purpose. It is the simplest and the cheapest form of life insurance as it covers the risk of death only. If the life assured dies within the period chosen (i.e. policy term), the insurance benefit (sum assured) would be paid to his beneficiary. No payment is made if the life assured survives the chosen period. Term assurance therefore falls within the broad “temporary” product categorization earlier mentioned.
Let me cite two of the many instances where term assurance becomes very useful. One, a man with a young family may want to make adequate financial provision for his dependants. He can do this by simply purchasing a term assurance of a huge sum assured at a very cheap rate. He then makes his dependant(s) the named beneficiary (ies) of the policy sum.
Two, a bank may protect itself on a short term loan it is about to grant to its customer by arranging a credit life insurance on his life. Credit life insurance is a form of term assurance that makes it possible for the life office to pay a loan balance to the creditor in the event of death of the borrower within the tenor of the loan which is usually the period of the insurance cover.
Suppose a man has a loan balance of $5,000 hanging on his neck at the point of death, his credit life insurance cover makes it possible for his creditor to receive payment from the insurance company instead of calling on his beneficiaries to make the payment. This achieves two things – (1) the borrower’s family has peace of mind as against suffering double tragedy of his death plus loan repayment and; (2) the asset acquired with the loan remains in the family instead of being repossessed by the creditor.
A Term Life Assurance cover could be arranged on a flat basis (level term) where the amount payable (sum assured) remains the same throughout the period of insurance, or be on a decreasing basis (decreasing term) where the benefit reduces as the period of cover decreases. A good example of a decreasing term would be a life insurance cover that reduces as the policyholder repays his loan periodically. As the loan balance drops, the amount of life insurance cover also reduces in a corresponding manner.
2. Whole Life Assurance
A Whole Life insurance product is a permanent life insurance cover as it is arranged for the whole of one’s life. It ceases to operate only when the insured person dies. This therefore means that the protection could last for a short period of time say, one year, or for a very long period, say till age 90; as the case may be. The insurance company pays the sum assured to the named beneficiary anytime the life insured dies.
In view of its permanent nature, a whole life insurance cover is usually more expensive than a term assurance policy. However, insurance companies do recognize that it may be difficult for the policyholder to continue to pay premiums after a certain age (say retirement at 60). For this reason, payment of premium usually stops at a certain age (e.g. 60 or 65) but the cover will continue to run till death.
Technically, as the policyholder’s age increases; the premium should also be increasing because of the higher risk presented by his advancement in age. However, whole life insurance premium typically remains the same throughout the period of premium payment. What happens here is that the policyholder pays much more than is needed for claims/benefits payment in the early years. The “excess” premium is invested and used to cater for the higher risk presented at old age. This “overpaid” premium is what lends credence to cash values that are made available under the whole life policies after about two to three years. The cash value therefore becomes a form of alternative benefit for a policyholder who decides not to continue with his policy after that period. In other words, the contract can be terminated and, unlike a term assurance policy, the accrued cash value (or surrender value) will be paid to the policyholder.
The idea of cash value also explains the reasons for policy loans usually given by life offices on permanent assurances like whole life. When a policy has acquired a cash value, say after two or three years, the policyholder can apply for a loan under the policy without terminating the contract. The loan is usually limited to a percentage (about 90%) of the available cash value.
One can still find further breakdown of products within Афиша the whole life classification of life insurance products. They can be classified as traditional whole life, universal life, and universal variable life assurance. What I have described in the preceding paragraphs is actually a traditional whole life product. That then leaves us with the remaining two types of whole life – universal and variable life.
Under a universal life policy, also called adjustable life, the cheap nba jerseys policyholder has more flexibility than wholesale jerseys the traditional whole life. A cash value account (or savings account) is created under the policy and this generally attracts a money market Need rate of interest. On accumulating enough cash value under the policy, the policyholder can decide wholesale mlb jerseys to cheap nba jerseys vary his premium payment provided there is enough money in the account to cover the cost.
As for a variable universal life policy, the a policyholder also enjoys the flexibility of varying his benefits and the cash value or his savings account is invested in stocks, bonds, money market etc to earn higher returns. This gives him both increased death benefit (life insurance protection) and higher investment account. However, just as these two accounts may grow, so also the risk of a cheap nba jerseys loss can be huge because of the possible fluctuations in investments. If investment performance is bad, both the death benefit and invested fund would go down. In recognition of this very important factor, many insurance companies do guarantee 10 the death benefits, at least up регистрации to a certain limit.
The universal life insurance market is quite wide, and it is becoming increasingly difficult to clearly differentiate between a pure universal life policy and a variable life product as various features of the two are being combined these days.
3. Endowment Assurance
An Endowment life product bears some resemblance to whole life assurance. It is, indeed, technically a combination of the features of term assurance and whole life products. Again, variations exist among companies and territories. But let me simply restrict the explanation to the basic, traditional, features of an Endowment Assurance plan.
The policyholder chooses a period of cover of, say, 10 years. He also chooses the benefit payable of, say, $50,000. If he dies within those 10 years, the life office will pay the $50,000 together with accrued bonus (“interest”) to his named beneficiary. If, on the other hand, he survives that period of cover of 10 years, then the policy is regarded as having matured, and the maturity value, comprising the original $50,000 and accrued bonuses, becomes payable to him. In other words, an endowment policy offers a combination of life insurance protection and investment.
Just the way a whole life policy is more expensive than an ordinary (term) life policy, so is an endowment policy more expensive than whole life assurance. If we ignore the cash values, a whole life plan provides just one certainty of payment (i.e. death), whereas the certainty doubles in case of an Endowment plan (i.e. premature death or maturity).
An Endowment policy is a permanent life policy like whole life and it also acquires cash values.
Let’s now turn to the last class of life insurance products – Annuities.
The three products described above are usually regarded as “death products.” Annuities, by their nature, are actually “living products,” though they also offer some elements of death benefits.
Annuity is a financial product which has the enhancement of retirement security as its sole objective.
Having taken you through this short journey into the world of life insurance, could that be all? No! Different kinds of hospitalization benefits, disability benefits, accident benefits, illness benefits, maternity products etc are provided under life insurance contracts, nowadays. That is why life insurance is stated as also helping to reduce the hazards of people becoming disabled. Depending on the country under consideration, health and disability products could be regarded strictly as life products, or as supplementary products to the main life policies.
It is also instructive to mention that many companies are now much more tilted towards “living” products than “death products.” Whatever the case is, and whichever environment one is considering, the basic concept of life insurance remains unchanged – to make financial provision for self and/or dependants.