Questions:
- What is term life insurance?
- What is renewable term insurance?
- What is level term insurance?
- What is convertible term insurance?
- What is decreasing or reducing term insurance?
- What are the types of decreasing term insurance available?
- What is mortgage reducing term assurance or insurance?
- What is group term insurance?
- What are the pros and cons of term insurance?
- Why buy term life insurance?
- What is whole life insurance?
- What is ordinary whole life insurance?
- What is limited payment whole life insurance?
- What is whole life endowment insurance?
- What kind of needs does whole life insurance cover?
- What are the advantages and disadvantages of whole life insurance?
- What is endowment insurance?
- What are the common endowment life policies?
- What is anticipated endowment?
- What is a juvenile endowment plan?
- What are the advantages and disadvantages of endowment life insurance?
- What needs does endowment life insurance satisfy?
- What is Family Takaful?
- What are the different types of children's policies?
- What are protected educational policies?
- What is children's deferred insurance?
1. What is term life insurance?
Term life insurance provides for the payment of the sum assured only if the life assured dies within a specified period. If the life assured does not die, the policy ceases and the premiums paid are retained by the insurance company. Thus, the premiums paid contain no savings element. As such, term life insurance provides the maximum protection on the life assured for a specified number of years.
Term insurance is regarded as temporary insurance (as opposed to permanent insurance like whole life), and as such, it does not provide any surrender values, paid-up values, loan values or any of the non-forfeiture privileges.
This relatively inexpensive form of insurance cover is useful for the following purposes:
To provide life insurance cover for a short period
To cover a loan
To cover the needs of a family in the event of the premature death of the life assured, before a house mortgage is repaid, or while the children are young
2. What is renewable term insurance?
Renewable term insurance is one in which the policyowner is allowed to renew his/her term policy, when it expires, for another term policy, irrespective of the insured's state of health at the time of renewal.
The premium payable is level during the term of each renewal and it will increase at the next renewal based on the attained age of the insured at the time of renewal.
Like all term policies, there are neither surrender values, paid-up values, loan values nor non-forfeiture privileges.
This relatively inexpensive form of insurance cover is useful for the following purposes:
To provide life insurance cover for a short period
To cover a loan
To cover the needs of a family in the event of the premature death of the life assured, before a house mortgage is repaid, or while the children are young
3. What is level term insurance?
Level term insurance is one in which the sum insured of the policy remains the same throughout the term of the policy. Should the life assured die at any time during the term of the policy, the fixed sum assured will be payable.
4. What is convertible term insurance?
Convertible term insurance is one in which the life insured has the option of converting his/her term policy, at any time during the term of the policy, to a permanent insurance policy such as whole life or endowment without evidence of insurability.
At the time of conversion, the new premium rate will be based on the life assured's then attained age.
5. What is decreasing or reducing term insurance?
Decreasing or reducing term insurance is one where the sum assured of the policy decreases each year to a zero balance at the end of the term. Sometimes it is a rider which is attached to a permanent insurance policy.
This type of term insurance is useful when the life assured needs the protection most at the earlier years of the policy. It can also be used as a means of protecting a mortgage.
6. What are the types of decreasing term insurance available?
There are generally 2 types of decreasing term insurance available. The first type is concerned with protecting a mortgage or loan. This type of insurance is usually issued as a basic plan and the premium is paid in one lump sum at the onset of the policy.
The other type is concerned with providing greater protection in the earlier years of the policy. It is usually issued as a rider on a basic plan and the premium is payable every year, together with the premium of the basic plan of insurance.
7. What is mortgage reducing term assurance or insurance?
Mortgage reducing term assurance or insurance is a form of decreasing term insurance whereby the sum assured of the policy decreases in accordance with the loan outstanding. House purchasers usually assign this type of policy to the banks as collateral securities for their housing loans. The policyowner usually pay a single premium for such a policy and the amount is dependent on the principal loan amount, the term of repayment, and the mortgage loan interest rate. At the end of the repayment term, the amount of cover decreases to nil, just as the loan outstanding does the same. Like all term policies, there are no benefits payable at the end of the policy term.
8. What is group term insurance?
Group term insurance is one that covers several persons under one policy, called a master policy. The individuals insured under this policy are not parties to the contract, although they do have certain rights under the policy. Usually, groups insured under group insurance policies are employer-employee groups. In this type of insured group, the employer is the policyowner and the employees are the insureds.
This type of insurance is usually a yearly renewable term insurance, and the premiums are intended to cover expected benefits and expenses for only the current policy year.
9. What are the pros and cons of term insurance?
The pros of term insurance are:
It provides the most cover for the least premium, compared to whole life and endowment insurances.
Renewable and convertible term insurances are flexible, and they safeguard the life insured against a sudden loss of insurability.
The cons of term insurance would include:
It does not offer any surrender, loan, paid-up values and non-forfeiture privileges.
Underwriters tend to underwrite such applications much more stringently and the non-medical limits are usually lower than that of permanent insurances.
As it has no savings element, the policyowner receives nothing at the end of the term of the policy.
10. Why buy term life insurance?
The reasons for buying term life insurance are:
To provide maximum amount of insurance protection for limted period at the lowest cost.
To protect the family from loss of earnings and to raise the children until they are independent.
To protect the family from debts due to the creditors if the breadwinner dies.
To provide additional death coverage in a pension plan or other forms of superannuation scheme.
11. What is whole life insurance?
Whole life insurance is a contract that theoretically covers the insured and a level premium is payable for life. If the insured dies, the sum assured less any outstanding policy loans are payable to beneficiary. Sometimes the sum assured will be payable when the insured reaches a certain age such as 85, 90 or 100 years.
This is a permanent insurance policy and hence, there are surrender values available. Depending on length of premium payment there are two types of whole life insurance i.e. ordinary whole life and limited payment whole life.
12. What is ordinary whole life insurance?
Ordinary whole life insurance is one where the premiums are payable throughout the lifetime of the life assured. If the life assured dies, the contract provides various settlement options to be payable to the beneficiaries.
After the first few policy years (normally the third), the policy will have accumulated surrender value. The policyowner may then apply for a policy loan (against the surrender value) to meet his/her financial needs. Furthermore, the policy can be converted to a reduced paid-up policy.
13. What is limited payment whole life insurance?
Limited payment whole life insurance is one in which the premiums are payable for a limited number of years (usually 10, 15, 20, 25 or 30 years). Sometimes, the policy is designed in such a way that premiums payment is not required from his/her retirement date (no matter whether he did retire) onward. After the premium paying period, the policy becomes paid-up for its full amount and no further premiums are required.
The purpose of this limited payment is to enable the policyowner to pay up the policy during his/her working lifetime so that after the completion of the specified period, the policy may remain in force without imposing further financial obligations on the policyowner. The premium payable is greater than that of an ordinary whole life insurance policy.
14. What is whole life endowment insurance?
Whole life endowment insurance is one where the premiums are payable throughout the lifetime of the insured and guaranteed cash bonuses will be paid at specified intervals while the policy is in force. The cash bonus is usually expressed as a fixed percentage (usually 10% or 15%) of the sum assured of the policy, and is usually payable at the end of each 5th policy year.
Some companies allow the cash bonus to be paid every 3 years.
The policyowner may withdraw the bonuses or keep them with the company. The company will pay interest (at a rate to be determined by the company) on the accumulated sum kept with it.
The premium payable is higher when compared to the ordinary whole life or limited payment whole life policy. Accordingly, the savings element is also larger, but immediately after the cash bonus is available, the reserve held back decreases substantially and accumulates again until the next cash bonus payment.
15. What kind of needs does whole life insurance cover?
The needs that whole life insurance covers include:
To protect the family in case of the breadwinner's premature death
To provide a savings fund (for example, the cash value can be used for retirement)
To provide protection for the lifetime of the policyholder
To protect the family from debts due to business, mortgage and other creditors if the breadwinner dies
To provide additional death coverage in a pension plan or other forms of superannuation scheme
16. What are the advantages and disadvantages of whole life insurance?
The advantages of whole life insurance are:
It gives the insured maximum permanent protection at moderate cost each year
It is most suitable to the average man/woman of moderate income and who requires considerable family protection with a savings element
It need not be renewed or converted as with some term policies
It has surrender values, loan values, and paid-up values; in addition, it contains non-forfeiture privileges
The disadvantages are:
It has a higher premium than that of term insurance
It requires premiums to be paid for the lifetime of the policyholder. This problem can be overcome by purchasing a limited payment whole life policy. However, the premium paying term is still relatively long
If the cash value has been exhausted, the policy will lapse and no more protection will be provided
17. What is endowment insurance?
Endowment insurance provides for the payment of the sum insured and any accrued bonuses at the maturity of the policy, or on earlier death of the life assured, whichever comes first. Premiums are payable throughout the term of the policy.
Theoretically, endowment insurance is made up of a pure endowment insurance (a pure endowment policy is one which pays the face amount of the policy only if the insured survives to the end of the term of the policy) and a term insurance. The pure endowment insurance will pay the sum assured if the insured survives to the end of the endowment period. The term insurance will pay the sum assured if the insured dies during the endowment period. Therefore, it can be said that the endowment insurance is a combination of pure endowment insurance and term insurance.
Like whole life policies, endowment policies steadily build up cash values. However, since an endowment policy matures much earlier than a whole life policy, the cash values build up more rapidly. And because of this, the premium payable is higher than that of a whole life policy.
This type of policy is a means of systematic saving with life insurance protection during the chosen period. It can be used for many purposes including:
Saving for retirement
Repayment of a loan
Repayment of a debt if death occurs before the loan is repaid
Providing funds for travel or for any future purpose, such as children's education
18. What are the common endowment life policies?
The common endowment life policies include:
Those payable in 10, 15, 25, 30 or more years
Those that cause the policy to mature at certain ages such as 55, 60 or 65
Those that cater for juveniles, especially for educational purposes
Those that are written for a short term, especially for savings purposes
Those that are written for a long term, especially for protection purposes and to provide for old age.
19. What is anticipated endowment?
An anticipated endowment is an endowment policy with guaranteed cash payments payable to the policyowner at regular intervals during the term of the policy. The full sum assured will still be payable should the insured die during the term of the policy. However, if the insured survives till the end of the term, then he/she will receive only the balance of the sum assured (usually 50% of the original sum assured).
This type of endowment allows the policyowner to receive payments earlier. This is in contrast to the normal endowment policy in which the policyowner has to wait until the end of the term in order to receive the full sum insured.
20. What is a juvenile endowment plan?
A juvenile endowment plan is specially designed to mature at specified ages for educational purposes. It is written to mature at the age at which the insured (a juvenile when the policy was first written) is embarking on his/her tertiary education.
21. What are the advantages and disadvantages of endowment life insurance?
The advantages of endowment life insurance are:
It provides life insurance protection together with a large savings and investment element
It has surrender values, loan values and paid-up values
Non-forfeiture privileges are included
It is flexible in that the term of the policy can be chosen to meet the financial need (when it arises) of the policyholder, whatever the reason for the need may be
The disadvantages include:
It only provides protection for a specified period
The premium payable is usually much higher than that of whole life insurance or term insurance
It does not have the renewability (a few companies do provide renewable endowment policies subject to a maximum issue age) or convertibility option available in term insurance.
22. What needs does endowment life insurance satisfy?
Endowment life insurance satisfies the following needs:
It provides a systematic way of saving for people who are extravagant
Furthermore, if death should occur at any time during the term, the insurance proceeds revert to the beneficiaries
It is guaranteed to satisfy a certain purpose or goal because the sum of money will be available irrespective of whether the insured lives or dies
It can serve specific purposes, for example, creating a retirement fund or an educational fund.
23. What is Family Takaful?
This is a form of life insurance that is prescribed in the Takaful Act of 1984. However, the Act itself has very few provisions on how the scheme should be implemented, except that it must be in accordance with the Syariah or principles of Islamic law.
The aims of the Family Takaful are threefold:
To encourage participants to save regularly
To invest the participants' money in ways which are not objectionable to Islam
To provide protection in the form of Takaful benefits to the heirs of participants who die before the maturity of their plans
All Family Takaful plans must be for a fixed period but they do not carry a fixed sum insured. The amount of benefits that a participant receives depends on the maturity period, the amount of contributions that he has agreed to make and profits, if any, earned from the investment of his contributions.
Family Takaful is a defined contribution plan. A participant decides on the size of his annual contribution provided that it exceeds or equals the minimum premium. The money paid goes into two different accounts, the Participants' Account (PA) and the
Participants' Special Account (PSA). The PA, into which the larger proportion of the money is paid, is a form of savings and investment account. Money paid into the PSA is paid with the intention of helping fellow participants in times of hardship. The actual proportion of each participant's contributions to this account is determined by the company based on the amount of payments it makes from that fund to the families of participants who die before the maturity of their plans.
Money from both the accounts are invested by the company on a profit and loss sharing basis in enterprises which are not contrary to Islam either in their operations or in the nature of their business. Profits generated by the investment of the PA funds are shared between the company and the participants in a pre-agreed ratio. Profits generated by the investment of PSA funds are used to beef up the fund.
Although the Islamic principle of Mudharabah requires the participants to share in both the profits and losses of the company, the committee on the Takaful Scheme recommended that any loss should be borne by the company alone.
Takaful benefits are paid to the participant if he survives until his plan matures in the following manner:
From his PA
The total amount of takaful installments paid by the participant during the tenure of his participation and his share of profits from the investment of takaful installments credited into his PA.
From his PSA
The net surplus allocated to the participant as shown from the last valuation of the PSA.
If he dies before his plan matures, the Takaful benefit is to be paid to a proper claimant, without any probate or letters of administration. A proper claimant is one who claims to be entitled to the benefits as executor of the deceased or one who claims to be entitled to such sum under the relevant law. The latter was provided for as participation is not restricted to Muslims.
If a participant dies before the maturity of his plan, the amount of benefits paid to the claimant are as follows:
From his PA
Total amount of installments paid by the deceased from inception date to the due date of installment payment prior to his death and his share of profits from the investment of installments which have been credited into his PA.
From his PSA
The outstanding takaful installments which would have been paid by the deceased should he survive the period of the plan, calculated from the date of death to the date of maturity of his plan.
If a participant decides to withdraw from the scheme before the maturity of his plan, then he is returned all the money in his PA and the profits which that money has earned so far. His contributions to the PSA, being a form of donation which he has agreed to make, is not returned. There is also a facility to part withdraw his PA but only after the plan has been inforce for two years.
The Takaful Act provides that a person under 18 years shall not have the capacity to enter into a Takaful contract. This differs from the Insurance Act, 1963, which provides that a person between 10 and 16 years of age can still enter into a contract with the written consent of his parents or guardian.
In the Takaful scheme, a participant is both the insured and the policyholder. Furthermore the scheme can benefit only the participant and his family and not a third party.
The Takaful companies are governed by the Director-General of Takaful who is also the Director General of Insurance.
24. What are the different types of children's policies?
There are basically 2 main types of children's policies, namely protected educational policies and children's deferred insurance. These policies are discussed in the following questions.
25. What are protected educational policies?
Protected educational policies are issued on the life of the parent or guardian. The child is named as the beneficiary and he/she will only receive the sum insured on reaching a specified age.
The purpose of this type of policy is to provide for the costs of higher education of a child. At maturity, the policy money may be paid in one lump sum or installments. It is also payable upon the death of the insured (the parent) during the term of the policy.
Such payment can be arranged so that the child can receive a portion of the summ insured at the time of his/her parent's or guardian's death and the balance upon his/her reaching the required age at the end of the policy term.
26. What is children's deferred insurance?
Children's deferred insurance is issued on the life of the child. The parent or guardian is the policyowner. When the child reaches the vesting age (either 18 or 21), the policy will be vested in the child (thereby making him/her the policyowner as well as the insured) and future premiums will be continued by him/her. Sometimes, the parent may want to continue paying the premiums, which is allowed by the insurance company.
The purpose of this type of policy is to provide the child with future life insurance cover. However, if the child dies before attaining the vesting age, the sum insured of the policy is not payable. Only the premiums paid (with or without interest, depending on the company's policy) are refunded. Should the child die after the vesting age, the full sum assured will be paid.
From the above, the implication is that the policy does not provide the normal protection until the child attains the vesting age. The insurance protection begins at the vesting age irrespective of whether the child is in good health or not. The policy then becomes a normal permanent insurance policy such as whole life insurance or endowment insurance.
The premiums are payable throughout the term of the policy. Sometimes, there will be a waiver of premium should the parent die before the child reaches the vesting age. In this case, an additional premium is required for the waiver of premium benefit. This additional premium is dependent on the age of the parent. After the vesting age, the child will have to continue paying the premiums.
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