Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a designated beneficiary an agreed sum of money upon the occurrence of the insured person's or persons death in return for the payment of a premium.
It is important to understand that the policy owner or beneficiary may be different to the Insured Person, however in such circumstances an insurable interest has to be determined, such as a banks interest in the Insured Person following the provision of a loan, or the interest of a dependent spouse on the earnings of a partner for the financial security of the family.
To be a life policy the insured event must be based upon the lives of the people named in the policy, the Life Insureds.
Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; for example claims relating to suicide, fraud, war, riot and civil commotion.
Life-based contracts tend to fall into two major categories:
Types of Life Insurance
There are three principal types of Life Insurance:
Term life cover
This is the simplest and one of the cheapest forms of life insurance designed to provide a defined sum in the event of death of the life insured during the term of the policy.
If a life assured dies before the end of the term defined within the policy, the sum assured is paid out to the nominated beneficiaries. If the Life Insured does not die during the term, no benefit is paid out and the policy ends.
The premium and the sum assured are normally fixed for the term.
Mortgage protection insurance
Mortgage protection insurance policies are designed to pay a defined lump sum directly to a lender to clear a mortgage or loan in the event of death of the Insured Person.
The term of a Mortgage protection policy normally corresponds with the term of the mortgage or loan. A Mortgage Protection policy is not designed to provide a cash lump sum to an Insured's dependants so separate life cover may be required if an Insured has a dependant family.
A mortgage protection can be arranged where the amount of cover, or sum insured reduces from year to year as the amount outstanding on a mortgage or loan reduces. This is known as reducing term cover and is the most common and the cheapest form of life cover.
A small number of insurers offer life policies that provide cover for the entire life of the Insured person, or for as long as the premium continues to be paid, and are know as whole of life policies.
These are less popular than other forms of life insurance, as the premium is higher, and can increase at regular intervals.
There are various types of whole-of-life policy, but the most common is a unit-linked whole-of-life. Part of the premium is invested in a fund. This fund is expected to grow at a certain rate so that its value is high enough to pay for the sum assured throughout the Insured's life.
The fund value is not guaranteed, so the premium may increase regularly in order to keep the sum assured or policy benefit at the agreed level.
Costs, insurability, and underwriting
The cost of insurance is determined by Insurers using mortality tables which predict the life expectancy on an Insured Person. Other risk factors considered are factors such as age, gender, smoking status, past medical history, family history, alcohol consumption, body mass index, occupation and hobbies.
Underwriters will also need to determine the purpose of the insurance. The most common is to protect the owner's family or financial interests in the event of the insurer's demise. Other purposes include estate planning or, in the case of cash-value contracts, investment for retirement. Bank loans or buy-sell provisions with shareholders agreements are another common need for Life Insurance.
Upon the insured's death, the insurer requires acceptable proof of death before it pays the claim. The normal minimum proof required is a death certificate and the insurer's claim form completed, signed (and typically notarized). If the insured's death is suspicious and/or the policy amount is large, the insurer may investigate the circumstances surrounding the death before deciding whether it has an obligation to pay the claim.
The use of the term 'Insurance' compared with 'Assurance'
The specific uses of the terms "insurance" and "assurance" are sometimes confused. In general, "insurance" refers to providing cover for an event that might happen (fire, theft, flood, etc.), while "assurance" is the provision of cover for an event that is certain to happen.
Trying to compare the merit of one Life Insurance policy and provider against another can be extremely confusing which is why we would recommend any Private Client seek specific consultation with one of our advisers before committing to purchase Life Insurance.
At Robertson Low our team of experienced advisers will take time to understand our Private Clients specific requirements providing them with competitive solutions to ensure they get exactly what they're looking for at the best possible price.
Further more we are there after the point of sale to advise you on changes or alterations you may require during the year or to provide you with advice and support in the event of a claim.