There are numerous insurance policies available right now but oftentimes, we get confused as to which of these policies is best-suited for us and will provide highest possible gain and maximum protection as well.
Hence, we have summarized below the general characteristics of insurance policies for your convenience.
But first, let us discuss the different types of risk as these should be highly considered in obtaining an insurance policy. These are:
- Speculative Risk where there is a possibility of gain or loss; and
- Pure Risk where there is no possibility of gain (e.g. death, disability or old age)
Therefore, being insured helps us become feel more secured about our future.
Now, let us discuss important insurance terminologies before we proceed to the comparison of insurance policies.
- Premium is the amount paid by the insured in exchange for claim upon the happening of a specified event or maturity of contract.
- Insured person is the person covered by the insurance policy.
- Policy is the contract.
- Policyowner is the person who pays for the insurance policy.
- Sum Insured or Face Amount is the amount given to the beneficiary.
- Insurer is the issuer of the insurance policy.
- Term Insurance covers the contract holder until a specified age limit.
- Traditional whole life policy, as the name suggests, will not run out.
- Account Value is the value of the variable life insurance policy based on the performance of the fund at the time of valuation.
- Minimum Death Benefit is guaranteed, other than incidental insurance benefits, payable to the policyholder regardless of the performance of the fund.
- Top-ups are additional premium injections which can be used to buy additional units in the fund. In Traditional life insurance, top-ups will require application for another policy. In Variable life insurance, top-ups can be paid anytime whether the purpose is to increase death benefit and/or the policyholder’s investment.
- Cash Value is the value upon cancellation of the policy. In Traditional life insurance, this is guaranteed and pre-computed and usually starts on 3rd Year. In Variable life insurance, cash value will depend on the performance of investments which may start in Day 1.
- Premium Holiday is the cessation of payment for premium. For Traditional life insurance, the grace period is 31 days. If premiums are still unpaid after the grace period, the unpaid portion may go to automated premium loan if cash value is not sufficient. For Variable life insurance, premium holidays are usually available anytime as long as there is account value.
As compared to Term insurance where there is guaranteed protection but no return of premium is given when the policy ceases, Investment-Linked or Variable Life insurance policies enable policyholders to enjoy capital appreciation and/or dividends depending on the performance of the fund.
Following are different types of Variable life plans:
- Single Premium Variable Life Plan – insurance coverage is up to 100 years old; minimum death benefit is up to 125% of single premium; one-time payment; premiums are used to buy units in variable fund to obtain long-term savings and investments; there is no fixed term therefore it is a whole life insurance; top-ups on single premiums are allowed; policyholders can vary life coverage; must be issued with a minimum death benefit; death benefit is higher of the account value or the minimum death benefit.
- Regular Premium Variable Life Plan – insurance coverage is up to 100 years old; minimum death benefit is up to 500% of annual premium; paid at regular intervals (monthly/quarterly/semi-monthly/annually); premiums are also used to buy units in the variable fund; top-ups are often allowed; withdrawals and premium holidays are available; death benefit may be (1) Level – which is highest among sum insured, account value or minimum death benefit or (2) Increasing – which is higher between sum insured plus account or minimum death benefit.
Following are the benefits of investing in Investment-Linked or Variable life insurance policies:
- Pooling of Funds – investors with low capitalization may not be able to participate in purchasing certain investments;
- Diversification – reduces the risk of investment by putting the fund into several categories of investment;
- Flexibility – policyholder may set his preferences as to the distribution of his premiums into protection and investment;
- Cost reduction – commission fees and other transaction costs are borne proportionately by policyholders; and
- Fund is managed by expert Fund Managers.
These are only some of the benefits of an insurance policy. We will provide additional information about its benefits in the succeeding articles.
Hope we have encouraged you to find out more about insurance and better yet, obtain an insurance policy for you and your loved ones!
– Mag, Your Partner in Decision-Making