Big Clams

Life-insurance policies can be complicated but by having life insurance explained a customer can learn the fundamentals and sort through the mess.  There are many financial products that fall under life insurance but most use the same mechanisms.

All life insurance is classified as long-term insurance. Pensions are also classified under long-term insurance.   Although there are fewer companies offering long-term insurance than general insurance in the UK, there are still many life insurance options for a customer.

Under the umbrella of life insurance there are two common forms; term insurance and whole-of-life insurance. 

Term insurance is the original and simplest form of life insurance, but still the most flexible.  Policy holders can be covered for a defined period of time.  A policy can be valid for any agreed period but the most common lengths are between ten and thirty years.

The premium is calculated annually with the premium increasing as the policy moves closer to expiry.  Policy holders can negotiate and have terms where the premium is reduced over the life of the policy. Once the policy has expired the policy holder may drop the policy or extend it at a recalculated premium.

When an insurance policy expires and it is being renewed, the policy holder is reassessed.  This is usually not a problem unless the policy holder has been diagnosed with a terminal illness, in which case an insurer will not renew a term insurance policy.   

The cost of life insurance is calculated by mortality tables and premiums are low compared to whole-of-life policies.  This is because a whole-of-life policy holder is guaranteed a payout, while the payout for term insurance is low.  If the policy expires and the holder doesn’t die then the policy is voided.

Most people take out these term-insurance policies to cover expenses should income stop due to death.  For example, many home owners can use the policy to cover the payout of mortgages and debts.  The greater the payout the greater the premium so most term insurance policies are written to avoid economic hardship for the people who survive the policy holder. 

Since the conditions are easy to understand, many policies are marketed through brokers and insurance comparison websites.  On these sites a customer is usually asked a series of questions such as their sex, age and lifestyle to calculate a customer’s position on a mortality table.  Customers must also choose a policy type to receive an accurate quote.

Term insurance differs from Whole-of-life insurance as it does not generate a cash value, rather the payout is fixed.  Whole-of-life insurance is essentially a savings and investment fund that pays out after the death of the policy holder. As the policy holder is guaranteed a payout the policy can be used as an investment vehicle.  The insurance can also be borrowed against.

Because of the nature of whole-of-life insurance, in many cases, they are managed by an independent financial advisor.  Receiving advice from a financial advisor or insurance expert is very important before entering this type of insurance contract.

There are many packages available in this area, and some funds may even be used before the policy is executed.  It can also be paid out if the policy holder is diagnosed with a terminal illness.

Whole-of-life insurance payments can be calculated as a fixed premium, or a reevaluated premium.  In a fixed premium the insurer guarantees that the cost of the policy will not increase, while the reevaluated premium is fixed for a set number of years before being reevaluated and new premiums charges.

What happens if premiums are not paid? This is difficult to answer as the penalties are dependent on the type of insurance package.  Any policy holder should clarify all these details before signing on the dotted line.

With term insurance the policy is terminated on default, but there is usually a grace period for a policy holder to pay the premium.  With whole-of-life policies, defaulting is more complicated because there is cash held within the policy.  Usually the policy is terminated if they money held does not cover the premium.  An insurer will withdraw money from the policy to cover the premium.

Most insurance policies have non-payment penalties detailed in the contract.  It is important for a policy holder to read these details.  Most life insurance companies want to keep customers so if there is a problem it is important the policy holder talk to the insurance company before defaulting.

This article explains some of the basics of insurance, it is important to get independent information before committing to any insurance plan.  Two organization that help consumers with UK life insurance information are the Financial Services Authority and the Association of British Insurers.   

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This entry was posted on Wednesday, July 23rd, 2008 at 2:25 pm and is filed under Commercial money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.