Sunday, August 28, 2005

Life Insurance I - Main Product Types

Having taken and passed (after many heartbreaking tries) a Life Insurance paper, I thought I might write something on it. No, of course not about those tries, but on the topic of Life Insurance. I get the impression that the public at large is not exactly sure what they are buying. Now if that's bad enough, then here comes the real bummer. I also get the impression that the agents in Singapore do not truly understand the products they are selling (When I was working, I used to get a lot of phone calls from agents asking me about product features)!

The main product types (keyword) available in Singapore (and indeed globally as well) are the term assurance, whole life assurance, pure endowment (getting extremely rare in Singapore), endowment assurance and annuity. Note that we are talking about life insurance here, so these products only pay out the sum assured when the policyholder passes away (or for some life products, upon survival up to some time period, I will elaborate on this below), as opposed to health insurance that pays out when the policyholder falls ill.

First up, some useful terms to know:

Contingency: In the insurance context, it means the (unfortunate) event for which cover is provided. For life insurance, it is almost always death (survival for a few cases). For health insurance, it is falling ill.

Policy term: The period of time for which you are covered.

Sum assured: The amount of cover chosen by the policyholder before entering the contract. This is paid out upon claim.

Premium: The monies you pay the insurer in return for the insurance cover.

Regular, limited and single premium: The former refers to premiums that are paid out to the insurer at regular time intervals (monthly, quarterly, half-yearly and yearly are what's available in Singapore) until the end of the policy term. The second also refers to regularly paid premiums, but for a shorter time period than the policy term. The latter refers to a single lump sum premium paid at the beginning of the contract and no further payment is then required.

OK, now we are all set to go.

Description of main product types:

Term assurance (TA): This covers the contingency of death for a fixed policy term. Survival to the end of the policy term will NOT result in any payment from the insurer. As such, pay out of the sum assured is NOT imminent. This results in TA premiums being much lower than other policy types. The TAs available in Singapore are usually of the regular premium paying type.

Whole life assurance (WLA): This also covers the contingency of death, but it is for life. Another way to understand this is its policy term is infinite (until death!). In this case, pay out of the sum assured IS imminent (everybody dies eventually!). Because of this, the premiums will be higher than the TA. The WLAs in Singapore are also usually of regular premium paying type. But the limited premium paying variant is becoming popular as people do not want to be still paying premiums at very old age.

Pure endowment (PE): This does not cover for any contingency, so to speak. It pays out only upon survival to the end of the policy term. Death before the end of the policy term means all premiums paid thus far are "forfeited". Another way to think of the PE is a fixed deposit that requires the owner of the account to survive to the end of the deposit period. As it does not provide insurance cover, it is not popular in Singapore. In fact, it is rare to find any insurer still selling a pure endowment product.

Endowment assurance (EA): This is actually the combination of the TA and PE. It pays out the sum assured upon death before the end of the policy term AND upon survival to the end of the policy term. So in this case, pay out of the sum assured is again imminent. The premiums are therefore more expensive than the TA. A hefty lot more. Despite that, it is a very popular product in Singapore, probably due to promise of the sum assured upon survival to the end of the policy term. Most agents now talk about the endowment without qualifying if they are actually talking about the PE or the EA. In the Singapore context, it is almost certainly the EA. The EAs in Singapore are usually of the regular premium paying or the single premium paying variants.

Annuity (AN): This covers the "contingency" of longevity. In other words, it covers the policyholder from living longer than expected (!) such that his/her savings will run out before he/she passes away. It pays out a regular income (usually monthly) to the policyholder as long as he/she is still alive at those points in time. ANs in Singapore are usually of the single premium paying variant although regular premium paying types are available overseas.

In my next post, I will introduce the main product DESIGNS (another keyword, this is as opposed to the main product types I have just introduced) available. There are three of them, namely non-participating, participating and unit-linked.

Akan Datang: Life Insurance II

215 days to go.


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