Lines of Business in Life Insurance; Life Insurance Products
Though the term 'line of business' is usually used in the field of Non-Life or General Insurance, we can use the same idea to separate Life Insurance into two distinct categories, one being Pensions and Annuities and Insurance being the other. Pension and Annuity products do not offer any risk cover while Life Insurance products do not provide any payments in the manner annuities do.
It is said that Annuities and Life Insurance work in 'opposite ways. Life insurance requires a person to pay regular and small contributions (premiums) to the Insurer for a specified period towards the creation of 'capital,' a risk 'fund, by the insurer, and on the occurrence of death, or after a specified period the Insurer pays back a specified amount to the Policyholder or their heirs. Annuities reverse the principle. Now the buyer pays to the Insurer an amount as capital, in a single or multiple instalments, and the Insurer guarantees to regularly pay back specified amounts after a specified date.
The lines of business are represented diagrammatically below in Figure 21.
Straight Life Immediate Certain Annuities & Pensions Single Premium Deferred Installments Level Term Term Life Decreasing Term Whole life Protection Traditional Insurance Endowment Money Back Variable life ULIP Investment Universal Life
Figure 21: Life Insurance - Lines of Business and Types of Products
Annuities & Pensions
Since Annuities are meant to provide the buyer with the regular payment of a fixed amount once the buyer has attained a specified age they are also called Pension Products. Annuities are of the two main types, but due to a combination of payment options each of the two also has different varieties: Immediate Payment, or 'Immediate - the
Annuity payments begin immediately after one month, three months, six
months one year following the date of purchase,
• Straight Life, or immediate: This type are purchased with a 'single' premium, but the annuities are paid out for the entire lifetime of the purchaser, and cease on his death
• Certain Period, or 'Certain': This is similar to the 'Straight Life' type, with a "Certain' period being chosen during which the annuities are paid to the holder, and if he dies during this period then the payments are made to the designated beneficiary for the remaining period. If the holder survives beyond the certain period the same Annuity continues to be paid to him for life.
a Deferred Period or 'Deferred' the Annuity payments begin after specified period called the 'Deferred Period,' and can be purchase either with a:
• Single Premium payment, or • Instalment Payments, periodically
paid
Both of these can be of the 'Certain' type described above. They can also be issued as 'Joint Plans, when the Annuity continues to be paid to the last surviving holder till his or her death. If the Plans are of the 'with profit' kind or are issued with riders such as 'Accident Benefits,' 'Double Accident Benefits' or "Disability' benefits, then accrual of any Bonus or Rider Benefit payment would add to the quantum of Annuity payment.
Life Insurance Products
The original purpose of life insurance is to offer risk protection in the event of death of the policyholder by providing his survivors with a certain sum of money which would help support them.
We could say that there are basically two families of Life Insurance Products - Protection and Investment Plans, but the families are interrelated, and Protection Plans have variants with elements of investment, and Invest Products also provide a component for risk protection.
Protection Plans The Term Insurance Policy
“Term' Insurance Policies evolved as basic instruments of risk protection.
They cover the risk of life for the term or specified period and pay the benefit if the policy holder dies within this period, at the end of which the 'protection' ceases and no 'benefit or amount is paid back to the policyholder. They are issued for periods ranging from one to thirty years. Many of the short duration policies carry a 'renewability' clause which means that the policy is renewal for additional terms up to the time of a specified age of the policyholder. The insurer will not deny renewal if the demanded premium is paid by the policyholder. 'Annual Renewable Term' is a common type of term policy where the insurer guarantees reissue of a policy of equal or lesser amount without regard to the question of insurability of the life Assured. The premium payable at each due instalment, from monthly to annual for a policy does not change during the term whatever its duration. But, at each renewal the premium payable would be as applicable for the age of the Assured at time of renewal.
There are two basic kinds of term policies:
• 'Level' Term - the Sum Assured, or 'Death benefit stays constant throughout the term, and
• Decreasing' Term - the Death Benefit drops is defined, proportionate decrements every year.
The Whole Life Policy
The Whole Life Policy is another type of 'protection' policy, but without a fixed term. It pays the benefit to the beneficiaries, inheritors or nominee after the death of the policyholder. The premium was originally meant to be paid throughout the life time of the policyholder but modern plans restrict the premium paying term to a specified age. Some altered plans have a maturity age, say 85 years, at which point the policy Sum Assured becomes payable even if the policyholder is alive. At times there is also a provision for payment of Bonus at maturity.
With the passage of time public demand surfaced for a product which besides providing risk protection would also give them some sort of financial return at the end, which would give policyholders a feeling of getting something back for all the
premiums paid over the years. Pure Protection plans such as Term and Whole Life Plans left them with the hollow, though irrational, feeling that all the money paid as premium was just a cash outflow with that amorphous feeling of 'security' which in the end was not even needed. They wanted something more, and Insurers came up with Endowment Policies as an answer. Endowment Policies
Strictly speaking a 'pure' Endowment Plan should provide not risk protection during its term but a capital sum, the 'endowment,' at the end of it. However Endowment Insurance policies are mainly risk protection instruments during their term and which also provide at the end a capital sum pay out which includes the policy sum assured and the accumulated bonus which is declared periodically by the Insurance Company. This is made possible by charging a premium which has two components, one of which, the 'mortality' premium, goes towards covering risk, and the other, the 'savings' component, which builds the maturity value and which is further augmented by profits that accrue to the corpus. In this way the Endowment
plan protects the risk of death during its term, and builds a corpus which is paid out at maturity. Compared ‘apple to apple, for the same term and sum assured, the pure 'Term' policies charge the lowest premium, the 'Whole Life policies also carry low premiums, but Endowment Policies are considerably more expensive. There are 3 different varieties of Endowment with which you should become acquainted:
Traditional Plans – these offered Risk protection for the value of Sum Assured plus accrued Bonus during policy term, and an endowment payment or maturity benefit of Sum Assured plus total Bonus at maturity. The accounting and investment of Savings component was totally the prerogative of the Company and the policyholder was only provided with information of the growth of the policy fund; the lack of transparency and of choice of investment options was the downside offset by an element of certainty of growth of corpus.
Money Back - The Money Back' plan became an interesting offering. It combined the component of Risk protection with a series of fixed payouts every few years to the policy
holder during the term itself. The customer has the 'feel of continuous protection and enjoying a cash inflow without having to wait for the policy to mature. While protection continued for the full value of Sum Assured during the policy's term, the policyholder also received at periodic intervals a payout of a portion of the Sum Assured. At maturity he received the balance amount left from the Sum Assured. This looked like 'Insurance Protection for ‘nothing and money for free, but actually it came at a heavier price than even Traditional Endowment policies. Again, like traditional plans these too also suffered from the same opaqueness, and during bull runs on the stock markets adventurous policyholders felt that greater flexibility and freedom to participate in the markets would have allowed them to reap greater profits. ULIPs were the natural outcome for this search for empowerment and profits with protection.
ULIPs The Unit Linked Insurance Plan is an endowment product which consists of two distinct parts. The “Risk' coverage forms one part and it is supported by the 'Mortality Charge' collected as a component of the policy premium. The balance premium, less administrative charges, is used to purchase 'Units' of an Investment Fund which is created and managed by the Insurance Company. This Investment Fund is created by pooling policyholder funds which are then invested in different asset classes such as debt market funds, equities, bonds and other asset classes. The units purchased under each policy are held in an attached 'Investment Account.' The policyholder can check his investment account's balance at any given time.
The valuation of the Investment Funds and the Units is maintained and declared on a daily basis by the Insurance Company. The policyholder receives full access to information about the balance in his account, the investments made by the Investment Fund and valuations. Often the Insurance Company maintains several Investment Funds each investing in different types of asset classes. For example a Company may maintain a Conservative Fund which invests mainly is debt instruments and corporate deposits, an Aggressive Fund which invests mainly in equities, and a Balance Fund which invests in a mix of equities and debt instruments. Policyholders are not only allowed to choose at inception which of these Funds they propose to hold their units in, but they are given liberty to reallocate, or 'switch, their units from one type of fund to the other depending upon expectation of better returns. This creates the feeling of empowerment, which with the transparency in maintenance of fund investments and valuations gives ULIPs the unique flavour of security of risk coverage with the thrill of participation in economic markets. Investment Plans
Universal Life and Variable Life insurance policies both have a savings account attached to them, and differ in the way the account is managed.
Universal Life Insurance policies are those under which the cash account receives money paid in as premium. The funds which accumulate in the 'cash account earn interest at guaranteed minimum 'money market rates of interest, but the actual rate is usually more. The mortality charge is paid out of the account, and this reduces the account balance.
If sufficient balance has accumulated in the account the policyholder can suitably adjust their premium payments into the account downwards, or upwards, and the policy coverage continues. The death coverage is guaranteed, as long as there is sufficient balance in the account to pay the premium.
Variable Life Insurance policies allow the policyholder to allocate premium balances left after mortality charges between one or more cash savings accounts for investment in equities, debt and bonds. While the death benefit is guaranteed the policyholder has the freedom to maximize his gains from investing in financial products.
The difference between these products and the more traditional policies is mostly that emphasis shifts more towards 'investments' and the build up of cash value, leaving the risk coverage as a fixed underlying element.
In the end all life insurance policies, other than pure term plans, are a mix of risk coverage with investment in different proportions and degrees of flexibility and control for the policyholder the investment portion.
0 Comments