Life insurance refers to the type of personal insurance that assumes long-term protection of the personal interests of the insured person. Life insurance provides for regular financial relations with a long period of time between the insurer and the policyholder.
Life insurance consists of various types of insurance in which the object of insurance is the life of a person. Nevertheless, the main purpose of life insurance is the accumulation of certain funds of the insured person for an important event in their own life or in the lives of their loved ones: adulthood, marriage, retirement and other important events.
In accordance with the terms of the life insurance contract, contributions can be paid monthly throughout the entire funded period (the moment of conclusion of the contract and the moment of occurrence of the insured event are taken into account). The insurer, during the entire funded period, carries out financial transactions with the client’s money: invests them in securities, bank deposits, and real estate. Therefore, by the time the insurance event occurs (retirement, reaching adulthood), investment income is accumulated by the amount of insurance premiums paid.
Insurance coverage is paid by the insurer most often in the form of lifelong financial annuity (lifelong annuity), and life insurance contracts are concluded with a lump sum payment of the entire insurance amount.
Life insurance implements the cumulative function of insurance (the function of accumulation and savings of funds), as well as a protective function.
There are four types of endowment life insurance:
- combined (mixed) life insurance;
- “on time” insurance;
- pension insurance;
- life insurance.
In case of mixed life insurance, the policyholder pays the insurance premiums established by the contract with a certain frequency. Throughout the life of the life insurance contract, interest is added to the accumulated total amount of contributions. Upon the expiration of the contract, the insured is paid the insured amount with interest.
For this type of insurance, the insured event is the survival of the insured (insured person) until the term specified by the insurance contract. An insured event consists of two criteria:
- the onset of a specific date specified in the insurance contract;
- finding the insured person in good physical health.
Mixed insurance also includes survival and death insurance.
The advantage of mixed life insurance over bank deposits is that, in addition to a stable investment income, insurance guarantees insurance coverage for a saved amount of money.
When concluding a mixed life insurance contract, the policyholder may include additional protection against other risks (for example, disability) in the insurance contract. If, within a certain period of time, the insured person becomes incapable of work, the insurer assumes the obligation to pay subsequent insurance premiums. After the expiration of the insurance contract, the insured (insured person) is fully paid the accumulated insurance amount. However, it should be borne in mind that the initial inclusion of additional services in the insurance contract significantly increases the amount of insurance premiums.
Cons and Benefits of Endowment Insurance
One of the main disadvantages of endowment insurance is the low rate of return. Compared to bank deposit programs, it is twice or even three times less. This is due to the fact that life insurance is designed for ten (twenty) years and is a long-term investment. It is very difficult to evaluate the return on investments of such a long period. Banking institutions prefer to conclude deposit agreements for a significantly shorter period than insurers. Also, banks can change the interest rates on the deposit (down), while insurers keep the established interest rate under the contract throughout the insurance period.
The insured person will be able to receive the accumulated amount under the life insurance contract only after the insurance term has ended. Upon termination of the insurance contract, the policyholder must know that a significantly smaller amount of money will be payable than the amount of insurance premiums made by him. The policyholder may not receive anything at all if he terminates the insurance contract in the first few years (two to three years).
If during the life insurance contract the death of the insured (insured person) occurs, the accumulated money is paid in full to the beneficiaries (heirs).
If the insured person receives a first degree disability during the term of the insurance contract, the insurer also pays the full insurance amount, and in case of temporary incapacity for work, the insurer pays benefits.
However, do not forget that a detailed list of the various conditions under which the insurer will be obliged to make insurance payments is negotiated in each individual case of insurance upon conclusion of a mixed life insurance contract.
“On time” insurance
Life insurance “for the term” is, as a rule, either to the end of the child’s school, or to the age of majority of the child. To date, for accumulative insurance of this type, the money for training is most often saved. Under the insurance contract, contributions can be made by both the insured person and other interested parties (parents and other relatives). The insured independently determines the insured amount.
The meaning of insurance “on time” is that with its help you can save up money before a certain period (for example, the purchase of a car for its 25th anniversary). The insurer calculates the amount of monthly contributions that the policyholder will make at the specified frequency to achieve the goal.
Life insurance “on time” differs from mixed insurance in that the heirs of the insured person (in the event of the death of the latter) receive the total insurance amount only upon the fixed date specified in the insurance contract. The same condition applies to such insured events as disability or disability. However, it should be borne in mind that if you have to wait with the payment of the insurance amount, then the insured person is exempted from the payment of mandatory contributions, this obligation passes to the insurer.
“Life insurance” life insurance events include:
It is important to know!
The interest rate for insurance “on time” will not differ much from the interest on bank deposits. Therefore, the insured person is given a great opportunity to insure against an accident and at the same time earn extra on interest.
This insurance is an excellent complement to state compulsory pension insurance. The size of the sum insured is determined by the policyholder independently upon conclusion of the insurance contract. In case of death of the insured person, the entire insurance amount goes to beneficiaries (heirs).
In case of loss by the insured person of disability (obtaining disability), the insurer assumes the payment of all subsequent insurance premiums. Conditional payments are made from the beginning of the date established by the contract in full.
Pension insurance has two varieties: temporary and life. Temporary pension insurance determines insurance payments over the period of time established by the contract (five, ten years), and for life insurance, pension is paid throughout the life of the insured person.
This type of insurance has one big plus: interest is accrued on the deposited insurance premiums at bank deposit rates, so the size of subsequent insurance payments will not be affected by inevitable cash inflation.
For life insurance, only one insurance risk is assumed – the death of the insured (insured person). The beneficiaries are paid the accumulated insurance amount for the duration of the insurance contract.
Interest on this type of insurance is not provided, therefore, due to inflation, this type is unattractive for policyholders. Nevertheless, life insurance is a good alternative to save accumulated funds. At the same time, it is always easier for heirs (beneficiaries) when an insured event occurs to receive the insured amount from the insurer than from other credit institutions.