Insurance terms can be confusing for some of us, especially when we first start buying insurance. Although many insurance agents and financial advisors tout the benefits of what their company’s product can do, you’ll still lose out if you’re unaware of typical insurance jargon.
So today we’re here to tell you what you need to know about life insurance. This will be a two-part article, with the second part providing more details on the type of premiums and life insurance plans.
Parties involved in the life insurance policy
There are a few parts you need to take note of when buying a life insurance policy. Although most of us would purchase life insurance for ourselves, resulting in overlapping terms, there would be occasions when we would instead purchase life insurance for our loved ones. First, we need to define what a life insured is. A life insured is a person covered by the policy in the event of an event (eg, death) specified in the policy. A plaintiff is a person who applies for the policy and is usually the policy owner, i.e. a person who holds the policy. And the beneficiaries are those who will receive the benefits of the policy.
What type of life insurance?
There is no one type of life insurance plan, each with different purposes. You can categorize different life insurance policies into three categories, with some overlapping subcategories. The three categories are participating, non-participating, and investment-linked (PLI) policies.
Participating policies are life insurance policies that offer a premium (either annually or at the end of the policy term) in addition to the sum insured. These bonuses are not guaranteed, which means that the additional bonuses stated in the policy are more of a guideline than a mandatory cause (the only sum guaranteed in your life insurance policy is the sum insured). These premiums can be paid in the form of annual premiums, terminal premiums at the end of the insurance term, cash dividends and milestone premiums.
Non-participating policies do not offer an unguaranteed premium because they do not have the benefits of an investment in the life insurance company’s participating fund. Term life insurance generally falls into this category; some life insurance companies will have a separate insurance pool for non-participating policies, which may not have investments in assets that can expand the pool and provide premiums. Click here to learn more about participating and non-participating funds.
Investment Linked Policies (PLIs) are policies in which cash values are not fully guaranteed, as all premiums paid will be invested in an underlying fund. The insured assumes 100% of the investment risk.
Now that you know the parties involved, as well as the type of life insurance plans, we would like to know what the payment terms of the life insurance policy are, as well as what types of benefits do we receive when the policy has been terminated due to death, expiry of the contract term or intentional early termination.
1. How much you contributed to the policy: Total premiums paid
A premium is an amount you pay annually or monthly (in some cases every two years or quarterly) to the insurance company to contribute towards your policy. Total premiums paid, or premiums paid to date, are the premiums paid from the inception of the policy to the current state of life insurance (or, when talking about death benefits, the day of the unfaithful event of the transmission).
Here are the average insurance premiums paid by a typical person in Singapore at different stages of their life. Note that premiums tend to differ by age, gender and lifestyle choices (if you smoke).
Average monthly premium for DPI term life insurance (to age 65)
To learn more about which insurance offers the most value for premiums paid, click here!
2. How much is your policy worth: cash value/policy value
Cash value, also known as policy value, is the current value of your policy or the amount of money your policy holds. Term life insurance and universal life insurance have no cash value.
For non-participating policies, your cash value is generally determined by the total premiums paid. In contrast, for participating policies, your cash value will include your premiums and dividends from the participating mutual fund’s investment assets. As with ILPs, your redemption value is the valuation of the performance of your asset.
Depending on your cash value, your insurer would offer certain benefits depending on the plan you chose. These benefits include taking loans against the cash value of the policy or even making partial withdrawals. Insurers will not provide these benefits at the start of your life insurance policy because there is not enough cash value in the policy to keep it in force.
Having a cash value policy also allows you to enable non-lapse options, such as surrendering your plan and recovering the cash value or using it to purchase insurance plans released or for an extended period.
3. What is your policy worth at the end of its term: Maturity Benefits
Every insurance policy has a termination date. For whole life insurance, the termination date is 99 years, while for capital accumulation plans, it depends on how long the insurer chooses to set the plans for ten years, 15 years, 20 years, etc. At the end of the maturity period, insurers would estimate the total cash value of the policy. You will receive maturity benefits when your policy ends in terms of sum insured, plus terminal premiums.
4. How Much You Receive When You Give Up Your Plans Early: Cash Value
Your Cash Value is the value you will receive if you surrender/fully withdraw/cancel your policy early.
This is where most people confuse cash value with cash value. Indeed, the cash value is often lower than your cash value. Despite what insurers claim, you can surrender your policy at any time, but they will penalize you when you completely surrender your policy. It’s about keeping you in the policy for as long as possible and avoiding dodgy short-term transactions.
In Singapore, the MAS and LIA have provided a disclosure guideline that insurance companies in Singapore must follow if they want to operate. These guidelines incorporate the information provided in the benefit illustration. A particular section titled “Effects of Deductions to Date” provides a chart that tells you the difference between the “Value of Premiums Paid to Date” and the “Total Cash Value”. These effects of deductions to date are the penalty that insurers charge for early termination, which is used to cover the costs of marketing and administering the business.
5. How much does your insurer promise to pay in the insurance contract: Sum insured
Now, sum assured is the simplest term in life insurance, but the most misunderstood. The sum insured is the amount of money predetermined by your insurer that is provided to your beneficiary if an insured event occurs. An insured event may include accidental death and dismemberment for personal accident plans and riders, critical illness for critical illness plans and riders, or death or total permanent disability (TPD) for health insurance plans. basic life.
Note that the sum insured is the guaranteed minimum amount that the insurer is required to pay as stated in the insurance contract. If the sum insured of your life insurance plan is S$100,000 in the event of death, the insurance company must pay you a minimum of S$100,000, which brings me to the next point.
6. How much does your insurer undertake to pay in the event of death: Death benefit
Life insurance covers your beneficiaries after death, so the death benefit is what your beneficiaries would receive in the event of their death. Now, because some people tend to buy endorsements, which are added to the sum insured, such as the accidental death benefit, which provides additional coverage with the sum insured in the event of death caused by an accident, others people would also get participating insurance, such as endowments, which provide unsecured bonuses and the sum assured as a death benefit. For investment-linked policies, death benefits would match the cash value of the policy, with some insurers offering a small additional percentage.
In summary, death benefits differ between different types of life insurance plans:
For non-participating life insurance plans, Death benefit = Sum insured + Riders (if included).
For participating life insurance plans (whole life; endowments; annuities), Death benefit = sum insured (guaranteed) + annual premium (not guaranteed) + riders (if included).
Generally, for ILPs, Death Benefit = Cash Value * (100% + n%) + Riders (if included), where n is the percentage promised by some insurers for this specific plan.
Now that you better understand the different terminologies of insurance, you can be more confident in understanding your policies better. To find out which life insurance policies are right for you, see our comparison here.
But why stop at life insurance? To learn more about insurance in general, click here!