Types of Life Assurance Policies

Term assurance
Basics of Investment linked policies
With profits policy
Unit Linked Policy

Types of Life Assurance Policies

Life Assurance policies can be broadly classified into Term, Whole of Life and Endowment Assurance.

Term assurance

In this case the life is assured for a fixed term. The Sum Assured is paid if death occurs within the term. However, on survival of the term no benefit is payable to the insured. Normally premiums will be low compared to other types as there are no benefits on survival.
In some contracts, however, premiums may be paid back with little or no interest, on survival.

Different variants of term assurance policies are available in the market.

• Level term assurance
• Renewable term assurance
• Convertible term assurance
• Decreasing term assurance
• Expanding term assurance
• Index Linked Term assurance
• Family income policies

Basics of Investment linked policies

Whereas term assurance is only a way of insuring the risk of death, the next two types are effective investment media. Both Whole of life and Endowment polices can be for a guaranteed return only - in which case they are called ‘non-profit’. Or they could be linked to the life office’s investment performance. Two ways to link a policy to the investment performance are - having a ‘with-profits’ policy or having a ‘Unit Linked’ policy.

With profits policy

Every year the life office evaluates the assets and liabilities of its life fund, to determine the surplus funds. A major part of this surplus (such as 90%) is allocated to with-profits policyholders as bonus, in the form of an addition to the sum assured. The bonus so declared cannot be subsequently reversed by the life office.

There are two distinct stages of bonus namely –

Reversionary Bonus: This is declared annually and added to the Sum Assured under the policy. It is called reversionary bonus as it is payable only at the time of claim and not at declaration.

Terminal bonus: where the bonus is payable only on the policy resulting in a claim.

While the reversionary bonus additions every year are on a cautious assessment approach, the terminal bonus can be construed as a reflection of fair return to policyholder at the last opportunity.

Premiums for With-profits policies are always higher than those for corresponding non-profit contracts, since higher benefits are paid out.

Unit Linked Policy

The value of the policy is directly linked to units in one or more unitised funds run by the life office. Part of the premium is used to purchase life and disability cover and remaining premium is used to buy units in the fund.
Usually the life office operates a variety of funds and the policyholder has options to invest in any of them and also switch periodically. On claim or maturity, the value of the policy is calculated based on the unit value on that date. The life office usually levies charges for fund management and fund switching.
Unlike the With profits policy where the bonus is attached irrevocably, here the profits will vary depending on the Unit value on the date of claim or maturity.

There are various flavors of investment linked policies structured based on their investment linkage such as:

• Whole of Life assurance
• Non-profit whole life policies
• With-profit whole life policies
• Low-cost whole life policies
• Single Premium Unit Linked whole of life policies
• Regular premium Unit Linked whole of life policies
• Endowment assurance