Life Insurance (2)
Life insurance (or life assurance) is a contract between an individual (policy owner) and the insurer, where the insurer agrees to pay the beneficiary a sum of money (generally referred to as Sum Assured) upon the death of the individual. In return for this obligation on part of the insurer, the policy owner agrees to pay a stipulated amount as premiums over regular intervals or as a lump-sum amount.
Most contracts have specific exclusions that are included as terms of the contract so as to limit the liability of the insurer.
Simply put, when an individual buys a life insurance policy:
• he is referred to as policy owner / policyholder
• he agrees to pay a certain amount of money (premiums) to the insurer for a certain period of time
• the insurer agrees to pay a certain lump-sum amount to a person nominated by the policy owner upon the death of the policy owner
• in some forms of life insurance products, the insurer also agrees to pay a lump-sum amount on the completion of the term of the policy upon the non-occurrence of the insured event i.e. on the survival of the policy owner
Life Insurance contracts, therefore, can broadly be classified as being:
1. Protection oriented policies: One of the most basic forms of life insurance, these products are primarily designed to cover the life of the insured and provide for a lump-sum benefit on the occurrence of death but do not pay any survival benefits i.e. no payments are made if the policyholder survives the term of the insurance contract.
2. Investment / Savings oriented policies: These products, while providing for life insurance, primarily facilitate the growth of capital on premiums paid by the policy owner. These product, therefore have an associated survival benefit i.e. if the policyholder survives the term of the policy, then a payment is made to the policy owner at the end of the policy term. This payment is usually equal to or more than the sum total of premiums paid by the policy owner to the insurer but may not always be so.
Life insurance products can broadly be categorised as being:
1. Protection oriented policies: These products are primarily designed to cover the life of the insured and provide for a lump-sum benefit in case the life insured dies. Such products are generally referred to as ‘Term’ plans. Some key characteristics of ‘Term’ plans can be summarised as:
• Lump-sum benefit paid to designated beneficiaries only in the event of the policyholder’s death
• The lump-sum to be paid on policyholder’s death is significantly higher than what would be payable under a savings oriented plan for the same amount of premium BUT No survival benefits are available i.e. no payments are made by the insurer if the policyholder is alive when the policy completes its term
• If the policyholder stops paying the premiums when due at any time during the term of the policy, the policy ceases to have any value
2. Investment / Savings oriented policies: These products, while providing for life insurance, primarily facilitate the growth of capital on premiums paid by the policy owner. Some key characteristics of these plans can be summarised as:
• These products are primarily savings plans with attached life insurance
• Part of the premiums paid by the policyholder are treated as savings while the remaining amount is used to buy life insurance
• The policy will pay a lump-sum in case the policyholder dies during the term of the policy or will pay out the amounts saved if the policyholder is alive when the policy expires
• The lump-sum to be paid on death of the policyholder is significantly less than what would be available under a ‘Term’ plan for the same amount of premium. This is because a large part of the premium is being treated as savings and only a portion being utilised to buy life insurance
Investments / Savings oriented products can further be classified as being
o Unit Linked Insurance Plans
o Traditional Plans