DETAILED EXPLANATION OF LIFE ASSURANCE
Life assurance deals with insurance of human life either in death, retirement, disability, etc. It has to do with situations that will definitely happen but when and how it will happen is not known. That is why in life, the word insurance is not used. Rather the use of the word ‘assurance’ is common. The policy holders are assured while they are alive that their dependents left behind after their demise will be provided with financial compensation. It is long time insurance contract because it runs for not less than five years and above. The covers that fall within the group of life assurance are:
- Term Assurance.
- Endowment Assurance.
- Whole life Assurance.
- Personal Accident Assurance.
A) TERM ASSURANCE
In this policy, the sum insured is payable in the event of death occurring within an agreed period of years. If the insured dies within the time, the sum insured is paid and if not, nothing is payable by the insurer.
It is the cheapest form of life policy and suitable form of insurance for old age, the cost of which depends on the age of the proposer of the policy.
For example, a term assurance on a life of a doctor, for example, for 7 years will only be entitled to beneficiary of the policy to the sum insured if the doctor dies within 7 years or exactly 7 years. The death of the doctor after 7 years or his survival will not qualify him or his beneficiary for any compensation.
FORMS OF TERM ASSURANCE
1) Convertible term assurance: This enables the policy holder to convert the term assurance into whole life assurance or endowment assurance, as the case may be. This conversion could be made later without subjecting policy holder to medical examination as it may have been required if he has not got any term assurance. An undergraduate that bought a convertible term assurance has the option of converting the policy to a better cover of his own choice between endowments or whole life assurance contract when he might have started working. Affordability might be the reason for choosing a low cost insurance, and as soon as the status of the policy holder changes, he can change to a better form of insurance.
2) Decreasing term assurance: This form of term assurance operates in the event of mortgage loan to be repaid, the sum assured in the policy will be the value of the loan. This will gradually reduce as the assured continues to pay the loan.
3) Increasing term assurance: This is a term assurance for a period of five years with the assured having the option to exercise any of the following:
- Renewal option: The policy holder has the right to renew the basic contract for the next five years without any medical examination.
- Increase option: The policy holder has the right to increase the sum insured up to 50% when exercising renewal option.
- Conversion option: The policy holder can convert the policy to whole life or endowment assurance when exercising the renewal option.
USES OF TERM ASSURANCE
- The cost of term insurance is low, making it useful for individuals or businesses that may have a large need for insurance but limited financial resources to pay for it.
- It is often used to help cover temporary needs. For example, decreasing term is frequently used to cover the decreasing financial obligation associated with debts. Term insurance can be flexible. Frequently it is used to provide additional protection for an insured.
For example, a husband has a relatively small whole life policy and becomes a father of twins. His responsibilities have suddenly changed and there is a need for possibly large amounts of additional life insurance. Term insurance could provide the solution to this problem. Often, the additional insurance is added to the existing policy by means of a rider.
B) ENDOWMENT ASSURANCE
In endowment assurance policy, the sum insured is paid at the end of an agreed number of years or if death occurs. It has combination of pure endowment and term assurance. Pure endowment ensures the payment of sum insured if the life assured survived the term of the policy. If he does not, nothing is paid by the insurer. Whereas the term ‘assurance’ part of the policy provides for the payment if the life assured dies within the term of the policy.
Therefore endowment assurance guarantees the payment of benefits either on the death or survival of the life assured within the term of the policy. It is usual in the following circumstances:
- Capital provision at retirement after the purchase or augmenting pension.
- Backing for credit facilities.
- Security for a loan for business or financing projects.
- Proceeded on maturity expended on specific purpose.
An endowment assurance can be a contract “with participation in profit” (i.e. with profit policy) or without participating in profit (i.e. without profit policy).
The premium for participation in profits is higher than that of non-participation or without profit policy.
Endowment assurance policies have been modified by insurance companies in Nigeria to meet the needs of the insuring public. The need behind this modification is to ensure the provision of income through regular cash payment at intervals, for the policy holder with varied but usual between 3-5 usually between 3-5 years into the policy with the payment of certain percentage of the basic sum assured at first interval and so until the policy lapsed.
TYPES OF ENDOWMENT POLICY
1) Ordinary endowment: This policy is issued for the fixed period of time like 5 years, 10 years, 15 years, etc and premium will be paid for that period. Insured amount will be paid by the insurance company after the maturity or on the death of insured, whichever comes first.
2) Family income benefit: This type of policy is very cheap and it is with either whole life or endowment assurance. The benefit is paid on the death of assured by installments, which may be monthly or quarterly.
The sum insured is payable from the date of death to the end of the selected term. But if the policy holder survives the item, then the endowment feature operates, the benefit is paid to the policy holder.
3) House purchase policy: This type of life insurance policy was introduced as a low cost version of the profit endowment policy. A lot of people bought these cheaper policies to cover house purchase loans.
4) Educational endowment: This is a wise man arrangement that involves making provision for one’s children. The children as a future of any country need to be adequately prepared for. It is made possible through the following:
- Child’s differed assurance: These are effected by the parent with the intention to provide a lump sum for the child at the option date which is usually fixed at age of 18 or 21. It is pure endowment policy which can be continued by the child on his/her own name without further medical examination and can be converted to either whole life assurance or endowment assurance. If the parent dies before the option date, the premium ceased but the policy continues until the option date when the child involved will be able to continue with the sum assured payable on the date of maturity. But if the child dies before the option date, the premium paid up to date is returned to the parent either with or without interest.
- School fees policy: This is the form of policy issued for the benefit of a child’s education. The essence is to ensure that the child education is not affected as a result of the death of the parent. This policy isa decreasing term assurance on the parents’ life with the sum assured reducing annually by the amount of school fees for the year.
C) WHOLE LIFE ASSURANCE
This contract provides for payment of the sum insured on death of the insured. Death excludes accidental death,unless expressly covered, usually with higher premium. The duration of this policy is throughout the life of the policy holder as well as the premium payment. This is what made the policy different from two assurances where the death of the policy holder must occur within an agreed number of years.
MODE OF OPERATION OF WHOLE LIFE POLICY
In whole life policy, the assured should pay the premium during the whole life time and insured amount is paid to the dependent of insured after his death and insured doesn’t receive any amount.
- Ordinary whole life policy: Under this policy, the insured has to pay premium whole life time and after the death of the insured, the sum assured is payable to his dependent or nominee. The main motive of this policy is to provide financial security to the dependent after death. In practice, under this policy, an insured has to pay premium for 35 years or 80 years of age, whichever is more.
- Limited payment whole life policy: In whole life assurance, the premium payment may be arranged to terminate at particular age when the life assured will not be in active employment and the essence is to prevent the policy from being lapsed for the reason of non-payment of premium. Some policies stop the payment of premium the moment the policy holder assumes a particular age, like 60years and the policy remains enforced as he lives. The sum insured is payable at death only.
- Convertible whole life policy: In this policy the insured can convert his policy into any other form of policy, particularly endowment policy, after expiry of 5 years or 7 years.
DIFFERENCES BETWEEN WHOLE LIFE AND ENDOWMENT POLICY
- The sum assured is payable only on the death of the life assured whenever it occurs.
- Premium payable is low.
- The payment of premium is throughout the life of the assured.
- Limited period to pay premium.
- Sum assured is payable at death of the assured or maturity date, whichever comes first.
- Premium payable is high.
- The payment of premium stops after the maturity date.
- Premium is distributed throughout the life of the assured which makes it more affordable.
D) PERSONAL ACCIDENT INSURANCE
This is a form of insurance policy that is concerned with the accident or health problems of the assured. The sum insured is paid to the beneficiary upon the death of the policy holder resulting from an accident, while a weekly benefit is paid to the policy holder in the event of injury suffered as defined in the policy.
FORMS OF PERSONAL ACCIDENT COVER
- Personal accident only: In this case of personal accident only, cover is provided for compensation for death or injury arising from “accident, violence, external and visible means”.
- Personal disability: In this case of permanent disability, an annuity will be paid to the insured. The payment is usually for a maximum period.
BENEFITS OF PERSONAL ACCIDENT INSURANCE
The benefits applicable under the personal accident insurance are:
- Death benefit.
- Permanent disability other than loss of eyes or limbs. In this case annuity becomes payable.
- Temporary total disability: Weekly benefits payable up to 104 weeks due to an accident.
- Temporary partial disablement: Reduced weekly benefits are enjoyed by the policy holder.
SPECIAL FEATURES OF LIFE INSURANCE
The special features of life assurance are:
- Long term contract: All policies of life assurance have the intention of continuity until the death of the life assured or maturity date. It usually take years for the benefits of life assurance to be enjoined unlike nonlife contracts which are mostly annual policies.
- Level of premium: The premium charged in life assurance is low throughout the duration of the policy. This is payable monthly, quarterly, half yearly or yearly. The premium is charged at the inception of the policy considering the age of life assured.
- Surrender value: This is a situation where the life assured is finding it difficult to pay the premium as agreed at the inception of the contract. This may be due to loss of job. The policy holder may request for the policy to be surrendered where the premium payable ceased and the amount returned to the policy holder is less than the total premium paid so far because the insurance company will deduct the expenses incurred in issuing the policy.
- Paid – up policies: In life assurance, it is possible for premium payable to stop and the policy continues. Although the sum assured payable on maturity will reduce. The reason is that the insurance company pays the premium on behalf of the policy holder which will be deducted along with interest when the policy matures.
- Participation with profit: There are some policies that share part of any profit made by the assurance company. The life assured person would have agreed upon with the assurance company at the inception of the policy which would have caused the policy holder a higher premium unlike ordinary policy which does not participate in profit. This money is paid in form of simple reversionary bonuses which are calculated at a rate percent on the sum assured, or compound reversionary bonus where bonus is calculated based on the sum assured in addition to the bonus already paid.
- Investment: In life assurance, the premium received from various policy holders (called life fund) are wisely invested in companies to ensure good returns on investment to be able to meet their future liabilities as well as creating income for the company. It will also assist the share holders, policy holders as well as government and still meet up with the obligations of claims payment upon the occurrence of the insured event. The Insurance Act 2003 has specified the type of investment that an insurance company could invest the life premium into.
- Loan: It is possible to grant loan to the policy holder but this is limited tohe amount of surrender value payable with interest fixed by the assurance company. The loan maybe used to solve policy holder’s financial problems or for settlement of future premium in time of financial difficulties.
- Days of grace: This is the period for which the life assured is expected to forward to the life officer after he (the policy holder) has failed to pay the premium when due. Monthly payments of life premium are usually given 14 days of grace and 30 days for other modes of payment.
DIFFERENCES BETWEEN LIFE AND NON-LIFE ASSURANCE
- Life assurance pays a death benefit when the insured party dies. So, it is insurance on someone’s life.
- Risk is certain though time of death is uncertain in life assurance contracts
- Life insurance is generally for longer period.
- In life assurance contracts, insurable interest must exist at the time of taking policy.
- The principle of indemnity does not apply in life assurance.
- Non-Life Insurance (such as home, auto, general liability)insurance covers something else other than a person’s life.
- Risk is not certain (occurrence of event is uncertain).
- It is always for a short period.
- Insurable interest must exist both at the time of taking policy and at the time of loss.
- The principle of indemnity is applied.
GENERAL USES OF LIFE ASSURANCE
The following are the general uses of life assurance:
- Provision of education funds for children: Life insurance proceeds can ensure that the education costs of the insured’s children are covered.
- Investment: A life policy is a combination of protection and investment which serves a useful purpose. The premium that the insured pays goes on accumulating in a fund every year. The sum so accumulated by the insurance company earns interest. Under life assurance, a person may also invest his capital in an annuity which will pay him an income every year till death. Therefore, insurance may be regarded as an investment.
- Collateral: A life insurance policy increases the credit worthiness of the assured person because it can provide funds for repayment of credits if he dies. Therefore a life assured person can use the policy as collateral for loan.
- Protection: Life assurance provides protection for individuals.The confidence is always there following his decision to participate in risk transferring system by contributing into the insurance funds.
- Mortgage protection: The proceeds of a life insurance policy can pay off the balance of a mortgage or provide an income stream to pay monthly mortgage or rent payments.
- Income replacement: In the event of an individual’s death, life insurance proceeds can provide a supplemental income stream to ensure that the surviving family members are able to maintain the same standard of living.
- Business loans: Life insurance protection on a key employee or business owner can be used to pay off the debts of a business in the event of that individual’s death.