Types of Life Insurance

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Types Of Life Insurance

There are basically two general types of life insurance from which you can choose: term life and permanent life Permanent life insurance is the second type of life insurance. Permanent life insurance covers you for your entire life, and the premiums on permanent life are higher. Permanent life insurance has several variations from which you can choose. The first type of permanent life insurance is called "whole life insurance". This type of life insurance policy covers you for your entire life rather than a specific term. A whole life policy will cost more on average and have higher premiums than term life policies, however, the investment potential and lifelong coverage are appealing to some insurance shoppers. Whole life insurance, which is a type of cash value life insurance policy that offers coverage throughout your life, comes in two varieties--participating and nonparticipating. Nonparticipating whole life insurance Nonparticipating whole life insurance policies come with a schedule of guaranteed premiums and death benefits, as well as a table of guaranteed values. You pay the scheduled premium when you purchase the policy, and as long as you continue to make timely payments, you remain covered until death or you have accumulated enough cash value in your policy to cover your premium payments. Your premiums may remain level throughout the life of the policy or they may increase after a fixed time, but those premium amounts are determined at the outset and should adhere to the payment schedule outlined in your policy. Participating whole life insurance Participating whole life insurance policies also have guaranteed premiums, death benefits and cash values, but these whole life insurance policies also pay a dividend based on the profits earned by the insurance company issuing the policy. In effect, you are "participating" in the company's earnings. The dividend is determined by how much profit is left over after the company has collected its premiums, paid claims and covered the other costs of providing insurance to customers. These dividends are typically paid out annually. Premiums for participating whole life insurance policies are usually higher than for nonparticipating policies.

The second type of permananet life insurance is called "universal life" coverage. You can add your preferred amount to the minimum price of the premium. The insurance company then invests the funds with returns that are put into the premiums, or left to accumulate. One subcategory of universal life insurance is universal variable life which lets customers choose what they want to invest in rather than the insurance company

choosing for them. The third type of permanent life insurance is called "variable life". With variable coverage, you have more investment opportunities, which includes stocks. These types of life insurance policies are similar to universal coverage because the returns are either used towards premiums or allowed to accumulate in an account. Your beneficiary receives either the value of the policy, in addition to a portion of, or the full cash investment returns account. Life Insurance has different types of products to offer like term plans, endowment plans, ULIPs and money back schemes. TERM PLANS: Term Plans are the purest form of life insurance that cover your risk of death. There are no additional frills to it. In the event of death, the nominees get the cover amount. If one survives the policy period, he doesn't get any benefits. The only way to choose the right term plan is to go by the cheaper premium cycle. Annually renewable term life policy: This would be a policy you choose to renew (or not to renew) each year. Because the price of the policy and premiums may go up as you get older, consumers may want to choose to avoid the annually renewable term life policy in favor of something like a guaranteed level term life insurance policy. This type of policy stays the same price for a specific time period of time that can range from 5 to 30 years depending on what you've chosen. Return of premium term life insurance: The newest type of term life is called ROP or return of premium term life insurance. It pays out the value to you at the end of the term if you are still living. If you die during the term the funds go to your beneficiary. ULIPs: It is a type of insurance, in which your premium amount is dived into two parts. One part, a small fraction of your premium, is used to provide you insurance.The other part, the much larger portion, is used to buy "units" of investment. The first part (insurance part) depends on the sum insured - the higher the sum insured, the more is the money spent to buy insurance. The money from the other part (investment part) is invested based on the type of the units - it can be largely in equities, or only in debt, and all the flavours in-between. The value of these units increases depending on the returns these investments provide. At any time, the sum insured is either the original sum insured that you chose at the time of buying insurance, or the NAV of all your units - whichever is higher.

ULIPs are insurance plans that double up as mutual funds. The annual premium you pay on ULIPs is linked to the sum assured and the policy tenure. Though in the first year your premium amount is a bit large, as the years go by your premium amount tapers. This yearly premium in your policy period is invested in an investment of your choice, and you are allocated units, based on the net asset value of the plan you have opted for. Just like a mutual fund. You can switch from one investment option to another free once a year. For example, if you think that stocks are doing well you can opt for a growth plan,but later if you feel that stocks are being overvalued you can opt for an income plan. ULIPs are for individuals who understand investing at the stock market but leave it to the experts to do the active money management.

ENDOWMENT PLANS: Endowment policies on the other hand offer some return on the premiums you have paid. While term plans cover just risk of death, endowment plans also offer some return on the premiums paid by you. Hence if you die during the policy term, your nominee will get the sum assured plus some returns. As much as this philosophy is very appealing it comes at a price, high premiums which drag down the returns form endowment plans to barely 4-6%. Endowment plan are available in two variants - profit plans & without profit plans. In the profit plans, the customer gets a part in the profits that the insurer is making through the premiums paid. Hence the premiums are high as compared to the without profit plan where although the premiums are cheaper, the customer will not get a part in the insurer's profit pool.

Traditional With Profits Endowments


There is an amount guaranteed to be paid out called the sum assured and this can be increased on the basis of investment performance through the addition of periodic (for example annual) bonuses. Regular bonuses (sometimes referred to as reversionary bonuses) are guaranteed at maturity and a further non-guaranteed bonus may be paid at the end known as a terminal bonus. During adverse investment conditions, the encashment value or surrender value may be reduced by a 'Market Value Reduction' or MVR (It is sometime referred to as a market value adjustment but this is a term in decline through pressure from the Financial Services Authority to use clearer terms). The idea of such a measure is to protect the investors who remain in the fund from others withdrawing funds with notional values that are, or risk being, in excess of the value of underlying assets at a time when stock markets are low. If an MVA applies an early surrender would be reduced according to the policies adopted by the funds managers at the time.

Endowments have been criticised, in the past, for offering low surrender values and providing poor levels of flexibility during periods when a client has an inability to make payments. As opposed to a mortgage lender who may allow for a degree of flexibility in such circumstances, as a consequence of redundancy etc, life companies will often make a plan 'paid up' if premiums are not studiously maintained.

Unit-linked endowment
Unit-linked endowments are investments where the premium is invested in units of a unitised insurance fund. Units are encashed to cover the cost of the life assurance. Policyholders can often choose which funds their premiums are invested in and in what proportion. Unit prices are published on a regular basis and the encashment value of the policy is the current value of the units. This is the simplest definition.

Full endowments
A full endowment is a with-profits endowment where the basic sum assured is equal to the death benefit at start of policy and, assuming growth, the final payout would be much higher than the sum assured.

Low cost endowment (LCE)


A low cost endowment is a combination of: an endowment where an estimated future growth rate will meet a target amount and a decreasing life insurance element to ensure that the target amount will be paid out as a minimum if death occurs (or a critical illness is diagnosed if included). The main purpose of a low cost endowment has been for endowment mortgages to pay off interest only mortgage at maturity or earlier death in favour of full endowment with the required premium would be much higher.

Traded endowments
Traded endowment policies (TEPs) or second hand endowment policies (SHEPs) are traditional with-profits endowments that have been sold to a new owner part way through their term. The TEP market enables buyers (investors) to buy unwanted endowment policies for more than the surrender value offered by the insurance company. Investors will pay more than the surrender value because the policy has greater value if it is kept in force than if it is terminated early. When a policy is sold, all beneficial rights on the policy are transferred to the new owner. The new owner takes on responsibility for future premium payments and collects the maturity value when the policy matures or the death benefit when the original life assured dies. Policyholders who sell their policies, no longer benefit from the life cover and should consider whether to take out alternative cover. The TEP market deals exclusively with Traditional With Profits policies. The easiest way

of determining whether an endowment policy is in this category is to check to see whether your policy document mentions units, indicating it is a Unitised With Profits or Unit Linked policy, if bonuses are in sterling and there is no mention of units then it is probably a traditional With Profits. The other types of policies - Unit Linked and Unitised With Profits have a performance factor which is dependent directly on current investment market conditions. These are not tradable as the guarantees on the policy are much lower and there is no gap between the surrender value and the market value.

ULIP v/s Endowment Plan for Life Insurance


What is a Unit Linked Insurance Plan (ULIP)? So, what is the advantage of a ULIP over an endowment plan? The answer is: Control A Unit Linked Insurance Plan (ULIP) provides you much more control over where your money is invested - You decide which kind of units to buy - they can be largely for stocks, for debt, or a combination of both. Also, you can switch between different units - usually a couple of times a year, depending on your insurance company. This means that depending on your analysis, you can move from stocks to debt to a hybrid investment - whichever way you want. This compares very favourably to endowment plans, where you have absolutely no control over where your money is invested. Another big advantage of ULIPs is that after a couple of years of buying the plan, even if you are unable to pay the premiums, the insurance cover continues. When you don't pay the premium, the insurance company sells some units to get an amount so that it can continue to provide the life cover for you! So, that is the comparison between ULIPs and Endowment plans, and ULIPs are definitely a better choice when compared to Endowment Plans. No wonder they are so popular!! But are they the best way to buy insurance? No. Term policy" is the best policy

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