Tuesday, April 21, 2009

What is Life Assurance

An assurance is the foremost type of life insurance. It deals with the contingency of death or survival of a human life, i.e. benefits are paid upon the death or the survival of the insured person. The date of death of the insured person is a focal point in determining the time that benefits will be paid out. In the Malaysian context, this section deals entirely with Conventional Assurances only. Takaful assurances will be discussed in the Takaful section.
Assurance policies may be participating or non-participating. A participating policy is one that subscribes to the performance of the insurance company. If the company does well for the year, a bonus may be paid out to the policyholders in the form of cash, or an increase in the amount of policy benefits. A non-participating policy is one where any surplus arising out of the policy belongs to the insurance company, and the price is usually cheaper than an equivalent participating policy.
Assurances are also broken up into Ordinary Life and Home Service policies. Ordinary Life policies are the standard life assurance policies where premiums were paid annually, semi-annually or quarterly. The premiums for Home Service policies were usually collected more frequently (as often as weekly), and they catered for policies with lower sums assured. The vast majority of assurances sold today in Malaysia are OL policies, while HS policies were more popular in the past when the typical policyholder had lower incomes.
Types of Life Assurance
Most of the life assurance products available today fall under one of the following classes:
· Whole Life
· Term
· Endowment
Whole Life Policy
In a Whole Life policy, the sum assured is paid upon death of the insured person, whenever it occurs. Level premiums are usually payable throughout the life of the insured person, but may cease at retirement or some other pre-agreed age (depending on the individual policy). You may also choose to pay a single premium at the start of the policy, instead of having to arrange regular premium payments.
Term Policy
A Term policy is similar to a Whole Life policy, except it operates only within a fixed period of time. The sum assured is paid upon death of the insured person, but only if the death occurs within the stipulated term (eg. 20 years). Premiums are usually payable throughout the term. If the insured person survives to the end of the term, the policy expires – no benefit will be paid, and no further premiums will be payable. Again, you may also choose to pay a single premium at the start of the policy, instead of having to arrange regular premium payments.
A special kind of Term assurance is the Reducing Term Assurance. This is usually a single-premium policy, i.e. a single premium is payable at the start of the policy. But the sum assured is reduced over time (usually reduced annually), so the premium is significantly lower than for a regular Term policy of the same term.
A common form of this is the Mortgage Reducing Term Assurance (MRTA), which is designed to cover the outstanding balance of a housing loan. As the borrower repays the loan amount, the sum assured is correspondingly reduced year by year, and the MRTA policy expires at the same time as the housing loan is fully paid back. This ensures that an insured person’s dependents will still have a roof over their heads should their breadwinner die unexpectedly.
Another kind of Term assurance is the Annually Renewable Term (ART), in which the term is fixed at one year. A premium is payable at the start, and the sum assured is paid if death occurs within the year. As long as the policy is renewed annually without lapse, the amount of premium payable for all future terms will be maintained at the same level.
Endowment Policy
An Endowment policy is a Term policy with a larger element of savings. The sum assured is paid upon death of the insured person or upon maturity, whichever comes first. This means that the sum assured is paid regardless of whether the insured person dies within, or survives to, the stipulated term. Level premiums are usually payable throughout the term, and these tend to be higher than for a normal Term policy due to the additional survival benefit. The cash value of an Endowment policy is, at any time higher than an equivalent Term policy, which reflects the larger proportion of savings to life coverage.
Types of Riders
Riders are add-ons that you can purchase to enhance the benefits of your basic life assurance policy. There are Life Riders, and Non-Life Riders. Some examples of Life Riders are the term rider (works just like an additional term policy), family income rider (pays a regular benefit for a period of time to the family of a deceased insured person), and bonus riders. Some examples of Non-Life Riders are the personal accident rider (pays another sum assured upon death or injury due to accidental causes), hospitalisation & surgical rider (pays for surgical costs and/or a regular benefit as long as the insured person is hospitalised), and the dread disease rider (pays a benefit if the insured person is diagnosed with any of a list of scheduled diseases).
Riders only operate as long as the basic policy is inforce, and cannot be purchased on their own. However, some of the Non-Life Riders may be purchased as standalone policies – Health and Personal Accident, for example.

Annuities
Annuities are policies that pay a regular benefit as long as the insured person is alive, in return for an upfront single premium. An annuity can be seen as the reverse of a life assurance – instead of paying regular premiums to get a lump-sum benefit upon death, the insured, who is called the annuitant, now pays a lump-sum premium at the start to receive regular benefit payments until his/her death. Annuities may be immediate (benefit payments start immediately) or deferred (benefit payments start at an agreed time in the future, usually the retirement age).
The major differences between assurances and annuities are:
- Assurance benefits are paid after death; while annuity benefits are paid while the insured person is still alive.
- Assurances cover the possibility of death occuring earlier than expected; while annuities cover the possibility of death occuring later than expected.
Annuities vary in shape and form, and many annuity products available today also include an amount of death benefit or income benefit within the policy.
As with assurance policies, annuities too may be participating or non-participating. A participating annuity is one that subscribes to the performance of the insurance company. If the company does well for the year, a bonus may be paid out to the annuitants in the form of an increase in the amount of annuity benefits. A non-participating policy is one where any surplus belongs to the insurance company, and the price is usually cheaper than an equivalent participating annuity.
In Malaysia, the only annuity product available is the EPF Annuity Scheme, which essentially consist of participating deferred and participating immediate annuities. There are differences between the Conventional Annuity and the Takaful Annuity, but these will be discussed in the Takaful section.

It’s an assurance. No, it’s an annuity. No…
As more sophisticated products are being developed, the lines between these classes of products are blurring. Many of the best-selling policies are ‘hybrid’ policies that incorporate elements of life assurance and annuities. This is done to cater for the needs of specific markets, and adds to the perceived-value of the policies, which translates to higher sales.

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