Technical Life Insurance Information

Non-traditional types of life insurance
Life insurance, more or less in its present form, has been practiced for approximately 400 years.  During that time, the basic policy formats have become very established and they still form a practical and useful role in providing this important form of cover.  However, the pattern of economic and social life does not stand still and new products have been developed, often providing a more flexible approach to life insurance cover and associated investment.  We look at two such examples.

1. Universal Life
   In an attempt to provide greater consumer choice and flexibility, this product has been developed.  It has been well described as a life insurance contract which:
   1. Is subject to a flexible premium;
   2. Has an adjustable benefit;
   3. Has an “unbundled” pricing structure; and
   4. Accumulates a cash value.
2. Unit-linked Long Term Policy
   Also known as “linked long term policy” and “investment-linked long term policy”, the unit-linked long term policy is one whose value is directly linked to, or directly reflects, the performance of the investments that have been purchased with the premiums paid.  This may be achieved by formally linking the policy value to units in a special unitized fund run by the insurer, or to units in a unit trust.  The value of the units is directly related to the value of the underlying assets of the fund or unit trust.  Because of such linkage, the policy value naturally fluctuates according to the overall movement of those assets.
   The product includes the following features:
   1. Common principle: unit-linked policies may come in a variety of forms, but there is a common factor.  All or part of the premiums will be used to purchase units in a fund at the price applicable at the time of purchase.  The value of the policy will then fluctuate according to the value of the units allocated to it.
   2. Types of funds: a variety of funds may be used for linking purposes, including equities (ordinary shares), fixed interest investments and a whole range of cash and other asset funds.
   3. Types of policy: in theory, any king of life insurance product may be unit-linked.  The most common in practice are whole life and endowments, sometimes with a guaranteed minimum value, however unit prices may move.

Special care must be taken with products which are essentially investments, so that the consumer is aware that values may go up or down.

3. Annuities and Pensions
   Each refers to income or other financial provision (usually) for retirement or old age.  A definition of each term is:
   1. Annuity: a contract whereby an insurer promises to make a series of periodic payments (called “annuity benefit payments”) to a designated individual (called “payee”) throughout the lifetime of a person (called “annuitant”) or for an agreed period, in return for a single payment or a series of payments made in advance (called “annuity considerations”) by the contractholder (or “annuity purchaser”).  Very often, the payee, annuitant and contractholder are the same person.
   2. Pension: a plan to provide for a monthly (or other periodic) income benefit to a person in retirement, until his death.  It may consist of an annuity.
   In Hong Kong pensions are often considered to be more in the Government realm (for example for civil servant).  More common in the private sector are Provident Fund Schemes, which provide for a lump sum benefit on retirement or other specified time, rather than an income.  Introduced a few years ago, the Mandatory Provident Fund Schemes (MPF) is expected to have a profound effect in this area.