Life assurance
|
|
Life Assurance (Life Insurance in US English) is an undefined legal term which relates to policies or contracts which contain an element that is contingent on human life. Whilst there are policies that pay out sums only on death, the majority of life assurance policies are entered into for investment purposes.
| Contents |
Basic life assurance
A basic life assurance policy would run something like this. A policy holder pays a single premium or a set of regular premiums to a life assurance company. In 10 years' time he will receive a lump sum based on some formula (which may be a fixed sum), or based on the performance of a particular portfolio or index. If he surrenders the policy before the 10 years are up, he will receive an amount calculated on a similar basis minus a market value adjustment or surrender fee. If, however, the policy holder dies before the policy matures, the policy holder's estate, or a named beneficiary or beneficiaries, will receive the surrender value plus an amount calculated by reference to a pre-determined formula.
Policy holders enter into these types of contracts for investment purposes: they fully expect to still be alive in 10 years' time - and hope to receive back from the insurance company more than they have paid in.
Some basic life assurance policies, however, have little or no investment element. These include term assurance and creditor insurance, both of which are described in greater detail below.
Annuities
An annuity is a policy that, after an initial premium or premiums, pays out a sum at pre-determined intervals. For example, a policy holder may pay £10,000, and in return receive £150 each month until he dies; or £1,000 for each of 14 years or death benefits if he dies before the full term of the annuity has elapsed.
Pensions
Pensions are a form of life assurance. However, whilst basic life assurance, permanent health insurance and non-pensions annuity business includes an amount of mortality or morbidity risk for the insurer, for pensions there is a longevity risk.
A pension fund will be built up throughout a person's working life. When the person retires, the pension will become "in payment", and at some stage the pensioner will buy an annuity contract, which will guarantee a certain pay-out each month until death.
With profit policies
For example, in the United Kingdom there are life insurance policies that are with-profit (insured value increases as returns accrue on the underlying portfolios) endowment life insurance policies.
Conventional with profits business
Unitised with profits business
Sandler report
Not with profit policies
Term assurance
Term assurance is a straightforward protection business. A policy holder insures his life for a specified term. If he dies before that specified term is up, his estate or named beneficiary(ies) receive(s) a payout. If he does not die before the term is up, he receives nothing. Policies typically contain exclusions for where a policy holder has a pre-existing condition of which he later dies. In the past these policies would almost exclude suicide. However, nowadays, after a number of court judgments against the industry, payouts do occur on death by suicide (presumably except for in the unlikely case that it can be shown that the suicide was just to benefit from the policy).
Creditor insurance
Immediate needs annuities
Linked business
Index-linked business
Property-linked business
Non-linked business
Single and regular premiums
They are either single-premium (policyholder makes one initial investment only) or multiple premiums (e.g. monthly premiums during the life of the policy). They pay out either in the event of the death of the policyholder or in the event of the maturity of the policy...but one or the other event will occur (is assured).