Life Insurance Terminology
- What does life insurance with or without profit mean?
- What does participating or non-participating life insurance mean?
- With respect to life insurance, what is a bonus?
- What is a simple reversionary bonus?
- What is a compound reversionary bonus?
- What is a death or claims bonus?
- What is a final or terminal or maturity bonus?
- What are guaranteed cash payments?
- What are policy dividends?
- What is policy cash value or surrender value?
- What is a policy loan?
- What is a policy date?
- What is a policy anniversary date?
- What is a policy due date?
- What is modal premium?
- What is annual premium?
- What is annualised premium?
- Who is an insured?
- Who is a policyowner or policyholder?
- Who is a policy payor?
- Who is a beneficiary?
- Who is a contingent beneficiary?
- Who is an assignee?
- Who is a mortgagor?
- Who is a mortgagee?
- Who is a life insurance agent?
- Who is an insurance broker?
- What is surplus and what is the difference between profit and surplus?
- What is an advance deposit?
- What is a future premium?
- What is a suspense premium?
- What is the difference between official, conditional deposit and temporary receipts?
- What are non-forfeiture options or discontinuation benefits?
- What is cash surrender and cash value?
- What is an automatic premium loan?
- Should I repay my policy loan or the automatic premium loan?
- What is extended term insurance (ETI)?
- What is a reduced or automatic paid up option?
- What are riders or supplementary benefits?
- What are the advantages and disadvantages of supplementary benefits or riders?
1. What does life insurance with or without profits mean?
Many life insurance companies offer whole life policy or an endowment policy "with profits". Sometimes, the with profits policy is a rider that is attached to the whole life or endowment policy.
A "with profits" policy is one where the policyowner shares in the profits that the company makes, and these are added to the benefit which is finally paid out. All else being equal, the premium payable will be more than that of a without profits policy. As you would have gathered by now, a without profits policy is one which does not share in the profits that the company makes.
2. What does participating or non-participating life insurance mean?
A participating life insurance policy (also called a with profits policy) is one which will participate in the distribution of surplus if the life insurance company's experience is favourable. Conversely, a non-participating policy cannot do so. Policyowner of a participating policy will pay a higher premium for a given sum insured than a non-participating policy because he/she will usually receive greater benefits.
Usually, the policyowner can elect to convert a non-participating policy into a participating one by payment of additional premium. The additional premium will commence from the anniversary date immediately following the date of conversion. The bonuses are granted only for the future period commencing from the date of such conversion.
However, policyowners are usually not allowed to convert a participating policy into a non-participating one. The rationale behind this is that all policyowners may want to convert their participating policies into non-participating ones when the company is undergoing a bad experience.
Sometimes, the participating policy is the rider attached to the basic policy plan (which is non-participating by itself). In this case, the rider can be attached at any time during the term of the basic policy plan subject to insurability. 3. With respect to life insurance, what is a bonus?
A bonus is a refund of excess premium paid to the policyholder of a participating policy. Such bonuses are paid out of the insurer's divisible surplus if the insurer's actual experience is favourable. These bonuses are usually deferred in that they are only payable at the end of the term of the policy, or when a claim arises. They cannot be withdrawn during the term of the policy; however, they do have a cash value (after a period of 3 full years, usually) and should the policy be surrendered, the cash value can be obtained.
4. What is a simple reversionary bonus?
A simple reversionary bonus is one that is calculated on a simple interest basis. At the end of each policy year, an annual bonus will be declared and this amount will earn interest for the remainder of the term of the policy. In this case, the interest on the bonuses that have been accumulated does not earn interest; only the principal amount earns interest.
5. What is a compound reversionary bonus?
A compound reversionary bonus is one that is determined on a compound interest basis. In this case, interest will be earned on the total of bonuses declared and accrued interest, i.e. both the bonuses declared and accrued interest will earn interest.
Bonuses on a compound interest basis accumulate at a faster rate than those on a simple interest basis.
6. What is a death or claims bonus?
A death bonus is one which is only payable on death. It is usually incorporated into a reversionary bonus rider to enhance the benefit payable on death. It is payable in addition to the sum of the annual bonuses which have been declared and vested at the time of death. However, if the insured survives until the maturity of the rider, the death bonus will not be payable. Some insurers will include the death bonus in the benefit payable for total and permanent disability claims.
The death bonus is usually only payable after the policy has been in force for a certain number of years. This is to allow the death bonus to accumulate to a significant amount. The rate is also dependent upon the company's financial condition at the time of claim. 7. What is a final, terminal or maturity bonus?
A final, terminal or maturity bonus is one which is payable at policy maturity. This bonus is payable in addition to the sum of the annual bonuses which are declared at the end of every year during the term of the policy. However, the final bonus is not payable on death or total and permanent disability.
The rate of final bonus will depend on the company's actual experience at the time of policy maturity. 8. What are guaranteed cash payments?
Guaranteed cash payments are cash payments which are paid at regular intervals during the term of the policy. This feature is usually found in permanent insurance plans such as whole life and endowment. The payments are guaranteed and are made as long as the insured is still alive.
As our country's health care system improves, the average person will live longer. Thus, such policies will become more expensive as the insureds live longer and thus collect more payments.
A good example of a policy with guaranteed cash payments is our Whole Life Special. 9. What are policy dividends?
Policy dividends are a refund of excess premium paid to the policyholder of a participating policy. Such dividends are paid out of the insurer's divisible surplus. In this case, the policyholder is given the right to participate in the distribution of surplus if the company's actual experience is sufficiently favorable. This distribution of surplus comes in the form of a policy dividend. The policy dividends can be kept with the insurer or withdrawn. If they are kept with the insurer, interest will be earned on the accumulated sum. The rate of interest is determined by the insurer.
10. What is policy cash value or surrender value?
Policy cash value or surrender value is the amount of money the policyholder will receive as a refund if the policyholder cancels the coverage and returns the policy to the company.
The cash value is only available for permanent insurances such as whole life and endowment. In these cases, the cash value is only available after the policy has been in force for three full years. This payment of cash value after a minimum period of three full years is guaranteed by law.
11. What is a policy loan?
A policy loan is one which is taken out on the security of the policy. It can only be taken out if the policy has a cash value. There is usually a cash value after the policy has been in force for three full years. Theoretically, the maximum loan value of a policy is 100% of the cash value. However, in practice, in order to prevent the sum of the loan value plus accrued interest from exceeding the cash value (causing the policy to lapse), the maximum loan value that will be taken out is 90% of the cash value.
The rate of interest charged on the loan will be determined by the company. An notice showing the outstanding balance and interest due will be issued to the policyowner at least twice a year until the loan is fully settled. The interest which is not paid within one month after it has become due or by end of the company's financial year will be accumulated at compound interest. There will be a minimum period for which the loan must run. This minimum period varies between companies, but in general, it is six months. If repayment of the loan is made before the minimum period is over, interest for at least the minimum period may be charged.
The life insurer does not insist on repayment of the loan as long as the policy is in force. At any time while the policy is in force, the whole or any part of the loan (together with accrued interest) may be repaid.
At the time of a claim, ie. settlement in the event of death or maturity of the policy, any loan together with the accrued interest shall be deducted from the amount otherwise payable under the policy.
If the policy is converted into paid-up or extended term insurance, the outstanding loan amount is deducted from the available cash value before it is used to purchase the paid-up or extended term insurance.
Policy loans should not be confused with study loans that some insurers offer as an additional benefit to their juvenile or children's policies. Such study loans are real loans similar to what you can get from the banks or finance companies. It is given only when there are suitable loan guarantors and the insured can show evidence of acceptance by the university. Like bank loans, such study loans must be repaid.
If there is sufficient cash value, a policyowner can always apply for a policy loan to finance the insured's (or anybody's) university education without resorting to a study loan.
The current interest rate charged by Manulife Insurance Berhad on policy loan is at 8% per annum. A RM5.00 stamp duty is imposed per RM1,000 of the loan amount.
12. What is a policy date?
Providing that there was no backdating, the policy date is the date of inception of the policy. This means that the coverage provided under the policy will commence at the policy date stated in the policy. The premium rate is calculated based on the age of insured nearest to this policy date or next birthday after this policy date, depending on individual insurer's practice.
Backdating refers to the practice in which the policyowner selects his last birthdate as the policy date so that the lower premium rate applies. However, in such a case, the insured is not covered during the backdated period. Usually, the applicant is allowed to backdate his policy up to a maximum of six months. 13. What is a policy anniversary date?
A policy anniversary date is the date this year when your policy will be an exact number of years from the policy date.
This date is important as your premium payment will be due on this date and some of your benefits may also be payable on this date. 14. What is a policy due date?
The policy due date (also known as premium due date) is the date at which a premium payment becomes due. Most insurance companies will allow a grace period of 30 or 31 days after a policy due date, within which the premium may be paid without penalty.
15. What is modal premium?
Modal premium is the premium that is payable on a premium due date. The frequency or mode of payment can be annual, half-yearly, quarterly, or monthly.
To determine the modal premium, an adjustment will be made to the annual premium by multiplying it by a factor taking into account that the entire year's premium is no longer received at the beginning of the policy year. Of course, if the frequency of payment is annual, modal premium will be equal to annual premium. 16. What is an annual premium?
An annual premium is the premium payable if the frequency of premium payment is annual. It is the practice of life insurers to quote premiums payable yearly in advance.
17. What is annualised premium?
Annualised premium is the total premiums (you can think of this as the sum of the modal premiums in a year) which are payable in a year if the mode of payment is not on an annual basis. For example, premiums could be paid half-yearly, quarterly, or monthly.
Except for annual mode policies, the annualised premium is always greater than the annual premium because of increased administrative cost. For annual mode policies, the annualised premium is always equal to the annual premium. Furthermore, the fact that the full (annual) premium is not held by the insurance company from the beginning of the year necessitates an additional charge.
Most life insurers state their annual new sales in terms of annualised premium.
18. Who is an insured?
An insured (or assured) is the person whose life is insured under the policy. The policy proceeds will be paid when the stated contingency affects the insured.
Normally, the insured is a single person. However, in joint life policies, there are two insureds, usually a husband and his wife. In family policies, the insureds are the entire family. In group policies, there are many insureds. 19. Who is a policyowner or policyholder?
A policyowner or policyholder is the person who has all the ownership rights of the policy. He or she is then allowed to
- Name and change the beneficiary (or beneficiaries) provided no trusts are involved
- Receive a policy loan
- Receive guaranteed cash payments or dividends
- Transfer the ownership rights to another person by assignment or endorsement
- Surrender the policy
- Convert the policy
- Change premium mode
- Change the correspondence address
- Add or drop riders
- Change the sum insured
- Reinstate the policy after it has lapsed
In contrast, the insured and the beneficiary, unless he is also the policyowner, possess no such rights.
20. Who is a policy payor?
A policy payor is the person who makes the premium payments. This term is usually used when the person making the premium payments is different from the insured. In most cases, this involves a juvenile policy in which the policy payor is the parent and the insured is the child.
In rare instances, the policy payor is neither the policyowner nor the insured. For instance, the father can be paying for a juvenile policy that his wife bought on their child's life.
Many life insurers sell a payor rider that waives all premiums if the payor dies or becomes permanently disabled.
21. Who is a beneficiary?
A beneficiary is the person (or a legal entity) who is entitled to receive the policy proceeds. Sometimes there is more than one beneficiary. In this case, the policy proceeds will be divided, in the amounts determined by the policyholder as specified in the policy contract, between the beneficiaries.
22. Who is a contingent beneficiary? 23. Who is an assignee?
A contingent beneficiary is the person (or party) designated to receive the policy proceeds if the insured person outlives the primary beneficiary (or one of the primary beneficiaries).
An assignee is the party to whom all or certain rights are transferred under an absolute or conditional (sometimes called a collateral) assignment. This assignment is essentially a transfer of legal rights under a life insurance policy. If it is absolute, all the rights are passed to the assignee. If it is conditional, only some of the ownership rights are passed to the assignee (usually for a temporary period).
The person who transfers the rights under the policy is called the assignor.
24. Who is a mortgagor? 25. Who is a mortgagee?
A mortgagor is the party who takes up a loan and pledge his/her property as security. A mortgage is a legal instrument under which a lender can claim the property pledged for a loan if the borrower does not make the loan payments when due. The purpose for taking up the loan is usually to purchase the property itself. Should the mortgagor default on the payments, the mortgagee has the right to repossess the mortgagor's property and put it up for sale in order to recover the outstanding amount owed. Usually, this measure can only be taken after a certain period has elapsed (for example, if the mortgagor has defaulted on 3 successive payments)
A mortgagee is the party to which the property is pledged, and who makes the loan to the mortgagor. The mortgagee has the right to repossess the property pledged for the loan if the mortgagor does not make the loan payments when due.
26. Who is a life insurance agent?
A life insurance agent is a sales person who is appointed by the life insurer to canvass for new business on individual lives and group insurance business and providing after-sales service throughout the life of the policy. He/she also carries out other tasks or duties as may be required by the insurer from time to time. In Malaysia, he/she is not allowed to represent more than one life insurance company, other than the company which appointed him/her. Furthermore, under the Insurance Act, an insurance agent may only represent a registered insurer.
27. Who is an insurance broker?
An insurance broker is an insurance salesperson or corporate entity who operates independently of any life insurance company. He/she is usually highly qualified and/or experienced in insurance. He/she/it is usually considered to be the agent of his/her/its clients, rather than the agent of any insurance company.
28. What is surplus, and what is the difference between profit and surplus?
Surplus is the term used to describe the amount by which a life insurance company's assets exceed its liabilities and capital.
On the other hand, profit refers to the extra income that is not needed to pay for the cost of providing insurance. Profit can be thought of as an addition to surplus.
What is an advance deposit?
An advance deposit is the minimum amount that is required to be submitted when an application for insurance is made. If premium mode is quarterly or less frequent, the advance deposit amount is often the first modal premium and the stamp duty. If premium mode is monthly, the required amount is often the sum of the stamp duty plus more than one modal premium.
If the proposal is accepted, a letter of acceptance will be issued to the proposer requesting him/her to make the necessary payment of premium within a certain number of days.
30. What is a future premium?
A future premium is one that is paid before it is due. These premiums earn interest at a specified rate determined by the insurer. They can be used to pay for the subsequent premiums, as and when they fall due. More importantly, it saves you the hassle.
An insurer may not pay interest on future premium on all of their policies as interest on future premium may be a feature available only for certain plans. Furthermore, a premium, paid before it is due, will not necessarily earn interest. You have to ask for it to be treated as a future premium. Your insurance agent should be able to advise you on your insurer's exact practice.
The name advance premium sounds similar to future premium. However, life insurers will usually pay no interest on advance premium.
Hint. Check with your insurer on the interest rate that they are using to accumulate your future premium. You may be pleasantly surprised! 31.
What is a suspense premium?
A suspense premium is one which is suspended because the insurer is unable to process and recognise it as premium, probably due to inadequate information.
For instance, a premium payment received may not be equal to an exact multiple of the modal premium of the policy, or the policy may have lapsed. In such an event, the correct procedure is to place the premium in the suspense account while a customer service representative contacts the policyowner to clarify matters. Life insurers cannot assume that the policyowner has paid the wrong amount because he may actually be making payment taking into account pending endorsements. However if the grace period for the premium due has expired, the life insurer will use any money in the suspense account to pay premium before resorting to an automatic premium loan.
Many companies treat advance deposits from new applications in the same manner until the policy is issued, after which, the relevant amount is extracted from the suspense account and credited to the premium account. Other companies place advance deposits in a separate liability account so that they can estimate new business premium more accurately during new business surges.
Usually, money treated as suspense premium does not earn any interest.
What is the difference between official, conditional deposit and temporary receipts?
An official receipt is given when the payment of premium is made directly to the insurer. This official receipt is often a stamped receipt containing the signature of an authorised person. It indicates that full protection is provided and the insurer's responsibility for all the liabilities is incurred. If the policyholder paid the premium by cheque, the receipt will be deemed invalid if the cheque is dishonoured for any reason. The policyholder will be informed of the cancellation and will be requested to replace the cheque with a new payment.
Today, many insurers are issuing computer generated official receipts that are unsigned with the understanding that such receipts are valid, provided that they are printed by the insurer's computer on valid receipt forms.
A conditional deposit receipt is issued to the policyholder when the amount of deposit is paid by the policyholder when submitting an application for insurance. Should the application be rejected or a counter proposal made by the insurer, the conditional deposit receipt will be deemed invalid. If the application is accepted and the full first premium is paid, the official receipt will be issued and the conditional deposit receipt cancelled. Some insurers print the offical receipt for the first premium inside the insurance policy without issuing a separate official receipt. Please note that this practice applies only to the first premium.
A temporary receipt is one which is issued if the agent is collecting the premium. The insurance company will then issue the official receipt on the basis of this temporary receipt. The date of payment to the agent is deemed to be the date on which the company received the payment.
33. What are non-forfeiture options or discontinuation benefits?
Non-forfeiture options or discontinuation benefits refer to the various ways in which a policyholder may use the cash value of his/her policy to keep it in force if he/she is unable to make any further premium payments.
The various non-forfeiture options include:
- Automatic premium loan
- Extended term insurance
- Reduced or automatic paid-up insurance
- Cash surrender
34. What is cash surrender and cash value?
If you surrender a policy after three years, you may be able to get back some money representing the unused portion of the premiums that you have paid. You are said to have cash surrendered the policy and the money that you receive is known as cash value.
Usually term policies have no cash value.
35. What is an automatic premium loan?
An automatic premium loan is one of the provision available to keep a policy in force in the event of non-payment of premium if the policy has acquired a cash value. Under this provision, a policy loan equal to the premium will be made to meet the unpaid premium. If subsequent premiums due are also not paid, further policy loans will be taken until the total of unpaid premiums together with the accrued interest (determined by the company) exceed the cash value available. When this stage is reached, the policy will be forfeited.
During the period in which the policy is kept in force under this provision, the policyholder may pay the outstanding premiums and interest. By doing this, the policy will be brought back to its original position and no evidence of insurability will be required. 36.
Should I repay my policy loan or the automatic premium loan?
Technically, the life insurer cannot demand repayment of your policy loan or automatic premium loan as the cash value belongs to the policyowner and not the insurer.
However, if you are not getting better returns (than the interest rate charged by your life insurer) on your loan, you are advised to repay it so that
- If you forget to pay your premium, there is cash value left for another automatic premium loan
- Your beneficiaries will enjoy full benefits in the event of a claim
- You, the policyowner, will receive the full benefits when your policy matures or you cash it
If you need to decide which loan to repay first, determine the interest rate charged on these two types of loans and note when your insurer capitalises the interest. An insurer may capitalise the interest at the beginning of its financial year, the calendar year or your policy year. Usually, the interest rate for both type of loans are identical but a few insurers may charge higher interest rates for policy loans to deter policy loans during times of high bank interest rates.
37. What is extended term insurance (ETI)?
This is one of the non-forfeiture options. In this option, the policyholder would have originally held a whole life or endowment insurance type of policy. All the available cash value less any indebtedness will be used to purchase a term policy with a sum assured equal to the sum assured of the basic plan less any indebtedness for the maximum period that the available cash value can buy.
If death occurs during this period of extended term insurance, the full sum assured of the basic plan less any indebtedness is payable.
If this extended term insurance expires, the policyowner receives nothing.
This non-forfeiture option provides maximum protection.
38. What is a reduced or automatic paid-up option?
This non-forfeiture option provides for reduced protection for a period equal to the term of the original policy. All the cash value less any indebtedness is used as a single premium to purchase a policy similar to the original basic plan. The new policy covers a period equal to the term of the original basic plan but with a lower sum assured. Usually, all riders will be dropped.
If the insured dies during the term of the reduced paid-up policy, the beneficiary will receive the reduced sum assured. If the policy matures, the policyowner will receive the reduced maturity value. No further premium is required to keep this policy in-force.
Should the policyholder wish to revive the original policy, he/she will need to satisfy the insurer as to his/her good health and on top of that, pay the outstanding premiums.
39. What are riders or supplementary benefits?
Riders or supplementary benefits are additions to an insurance policy which expand or limit the benefits payable and which become a part of the insurance contract. They are usually attached to insurance policies in order to provide additional benefits.
Some life insurers package different type of benefits as separate riders so that they can have the flexibility of combining these riders to form contracts with different set of benefits to suit different customers without having to go through the process of designing a new policy.
40. What are the advantages and disadvantages of supplementary benefits or riders?
The advantages of supplementary benefits or riders are:
- The benefits payable can be expanded or limited, depending on how much the policyholder can set aside for premiums;
- The effects of inflation can be countered by purchasing riders which provide an increasing amount of coverage over time;
- The benefits provided by the basic plan of insurance can be complemented;
Additional benefits can be provided on the occurrence of a dread disease, accidental death, disability or hospitalisation; and
- The added coverage provided is usually cheaper than that provided by the basic plan
- The disadvantages include:
- If the policyholder applies for the rider after the policy has been issued, depending on the type of supplementary benefit rider and amount of coverage requested, he/she may be required to undergo a medical examination in which the cost will be borne by the policyholder;
The approval of certain riders may be delayed pending an investigation. For example, a request for a large accidental death benefit rider might be held until the company verifies the insured's current occupational and medical status;
The policyholder must have a basic plan of insurance before any rider can be purchased;
The amount of coverage of the rider is usually limited by the amount of coverage of the basic plan of insurance; and
The riders will be automatically terminated once the basic plan of insurance is terminated.