Technical Life Insurance Information

Traditional Types of Life Insurance
The major traditional types are as follows:

1. Term Insurance

   Such a policy plan provides cover for a specified period or term only, and may also be described as temporary life insurance.  The policy benefit is only payable if:

   1. The life insured dies during the specified period, or term; and
   2. The policy is valid at the time of death.

   In the great majority of cases, term insurances run their course without a claim.  For these reasons, it is the cheapest for of cover available (but of course, its limitations must be understood).
   In theory, the term could be for any period of time, even a few hours to cover and aircraft flight for example.  In practice, it is rare to find a term insurance for a period of less than one year.

2. Level/decreasing/increasing Term Insurance

    

   1. Level term insurance: this policy plan is perhaps the most popular term insurance.  It involves a level death benefit throughout the policy period.  In the event of death during the term, the face amount (also known as the face value) of the policy is payable.  The level of annual premium usually remains the same throughout the policy term.

   Popular largely because of its simplicity, this is a useful need which neither increases nor decreases to any significant extent over the period of time involved.

   1. Decreasing term insurance: under this plan, the death benefit decreases annually, or at other specified times.  The level of annual premium usually remains the same throughout the policy term.  Because the benefit is continually decreasing and is payable only on death during the term, this is the cheapest for of life insurance available.  It is particularly suited for a temporary need which is reducing.  Some typical examples are:

    

   1. Credit life insurance: designed to pay the balance of a loan direct to the lender should the borrower die before a full repayment of loan has been made.  This plan is usually sold to lending institutions on a group basis to cover the lives of their borrowers.
   2. Family income insurance:  perhaps linked with another plan which provides a lump sum payment on death, a family income plan provides a stated monthly death benefit payable to the beneficiaries for the remainder of a specified period.
   3. Mortgage redemption insurance (or mortgage protection): a typical mortgage loan is reduced by monthly or other periodic payment.  Mortgage redemption insurance is a decreasing term insurance designed to provide an amount of death benefit which corresponds to the decreasing balance of a mortgage loan.  At any rate, the initial face amount and the subsequent reduced amounts are set at the time of purchase on the basis of the plan of repayments.  Such a plan may be on a joint-life basis (e.g.) husband and wife), the benefit being payable when the first life dies.  This type of insurance cover must not be confused with Mortgage Indemnity Insurance.  This is quite different, being insurance for banks and similar lenders.  It covers the possibility of non-repayment of mortgage loans, where the mortgaged property has to be sold in adverse market situations, thereby resulting in a loss to the bank, etc.
   1. Increasing term insurance: this plan, as the name suggests, involves a death benefit which increases annually or at other intervals.  The increases may be at a fixed percentage, or in line with an agreed index (e.g. consumer price index).  The basic idea is to keep the benefit in line with the value of money, especially in case of inflation.  The premium generally increases in line with the increases in the level of benefit.

    

3. Renewable/convertible term insurance

1. Renewable term insurance: at first sight, this seems to be a contradiction, because term insurance is for a fixed period, and this extends the period.  The key point, however, is that the right to renew the policy is without submitting evidence of insurability (health) and the premium for the further period is increased to reflect the increased age of the life insured.  (The new premium is said to be based on the attained age.)

Because such a plan can involve anti-selection there may be some limitations applied, such as:

1. Renewals may only be for equal or smaller face amounts;
2. The number of renewal permitted may be restricted;
3. Premium rates may be higher than those for non-renewable policies.

Frequently, one-year term policies are made renewable, either by a basic policy provision or a rider.  These have the obvious name yearly renewable term or annually renewable term insurance.

1. Convertible term insurance: such a plan includes a conversion privilege, which gives the policyholder the right to convert (change) the policy to a permanent plan without evidence if insurability (health).  If this privilege is exercised, the premium for the wider plan must be calculated on the basis of the standard rate for such a plan on the attained age of the life insured.

Because anti-selection is again a possibility with these plans, there may be restrictions:

1. Conversion may not be possible beyond a certain age;
2. Conversion may not be possible after the policy has been in force for say 50% of its specified term;
3. The face amount of the new plan (permanent insurance) will be limited to that for the term insurance.

(2)  Endowment Insurance
An endowment plan provides for the payment of the face amount at the end of a specified term or upon earlier death.  Should the life insured survive the term, the policy is said to be mature.  Thus, a claim may arise under such a plan either by death or maturity.  As with term insurance, the description of the policy must include reference to the number of years of the term involved.  Features to be noted with this plan are:

1. Premiums: are not cheap, since under normal circumstances a claim must arise not later than the specified number of years in the future; premiums are level, normally paid annually, although single premium endowments are possible;
2. Technically: the plan is a combination of a term insurance a pure endowment for equal amounts.  (A pure endowment is a contract under which the benefit is only payable if the life insured survives the term);
3. Par or non-par: such a plan may be on a participating (with-profit) or non participating (without-profit) basis, at an appropriate premium;
4. Popularity: because in principle such a plan provides the best of both worlds (premature death protection and personal savings for the life insured if the policy matures), these have an apparent attraction.  However, probably because of the relatively high cost of premiums, such plans do not have great popularity in Hong Kong or in many other markets at present.

(3) Whole Life Insurance
Such a plan, quite literally, involves a policy that is designed to last the whole of one’s life (sometimes it is called whole of life insurance).  The fundamental feature is that the face amount is paid on death, whenever that occurs, and not before.  Such policies, therefore, may be in existence for many years, even several decades.  The relevant features to note are:

1. Premiums: are level, but may be subject to different provisions, including:
1. Payable throughout life: in which event the policy may be called a straight life insurance, or a continuous premium  whole life policy;
2. Payable for a limited period: the policy may specify a number of years, after which no more premiums are payable, although the benefit is not paid until death takes place;
3. Premium subject to an age-related limitation: instead of specifying the number of years, the policy may stipulate a certain age after which no more premiums are required.
2. Par or non-par: either for of cover is permissible;
3. Variations: many variations are possible, such as premiums which increase, or face amounts which change, at specified times during the policy’s life, to cater for different needs as time goes by.  One such variation is called a graded-premium policy, where the premium increases on a regular basis until it reaches an amount that becomes the level premium for the rest of the life of the policy.