LIFE INSURANCE CONTRACTS

LIFE insurance is a protection against financial loss that would result from the premature death of an insured life or on survival to a set date. The named beneficiary receives the proceeds and is thereby safeguarded from the financial impact of the death of the insured.

The basic transaction of insurance is an exchange that is the policyholder pays a premium or a fee for a contract or policy in return for later payment (benefits) from the insurer which is contingent upon death or survival or possibly the state of health of the policyholder.

Take note that a premium can comprise one or more regular payments, and the payments depend on the policy type and or policyholder preference.

A life insurance contract is a formal contract-document issued by an insurance company to an insured individual. It (1) puts an indemnity (protection against loss) cover into effect, (2) serves as a legal evidence of the insurance agreement, (3) sets out the exact terms on which the indemnity cover has been provided, and (4) states associated information such as the (a) specific risks and perils covered, (b) duration of coverage, (c) amount of premium, (d) mode of premium payment, and (e) deductibles, if any.

Life insurance contracts also known as policies are entered into between a life insurance (assurance) company and one or more persons called the policy holders. The policyholders will agree to pay an amount or a series of amounts to the life insurance company called premiums. The premiums may be paid: On a regular basis (known as regular premiums), typically paid monthly, quarterly or annually, or as one single payment (known as a single premium). In return the life insurance company agrees to pay an amount or amounts called the benefit(s), to the policyholder(s) on the occurrence of a specified event such as an accident, fire or even death among other eventualities. The benefits payable under simple life insurance contracts are of two main types.

(a) The benefit may be payable on or following the death of the policyholder. For instance, a term assurance contract, whereby the insurance company will make a payment (the sum assured) to the policyholder’s estate if the policyholder dies during the term of the policy.

(b) The benefit(s) may be payable provided the life survives for a given term. An example of this type of contract is an annuity, under which amounts are payable at regular intervals as long as the policyholder is still alive. The simplest life insurance contract is the whole life assurance. The benefit under such a contract is an amount, called the sum assured, which will be paid on the policyholder's death or on survival to a set date.

The two key policies provided by the pension and life insurance industry are: (1) Assurance Contracts: These are policies where the benefit is paid as a single lump sum. (commonly known as sum assured) either on death of the policyholder or on survival to a predetermined date, decided on by both parties. The type of policies include: whole life assurance, term assurance, pure endowment, endowment assurance and critical illness assurance to mention but a few.

Further, details of the types of insurance contracts include; (a) Whole life Assurance whereby the life company (insurance company) pays out a lump sum payment (sum assured) on the death, or at the end of year of death of the policyholder. (b) Term Assurance; a contract that pays a sum assured on or after death provided death occurs during a specified period called the term of the contract. Take note that, no payment is made if the policyholder survives to the end of the specified term. (c) Pure Endowment; a contract that provides a sum assured at the end of a fixed term provided the policyholder is alive at that point. Take note that, no payment is made if the policyholder dies before the end of the term. (d) Endowment Assurance; a contract that provides a sum assured on the earlier of death or survival to the end of a fixed term. (payment or benefits are paid on death or survival to the contract maturity date) this presents a combination of term assurance and pure endowment with the same term. (e) Critical Illness Assurance; this is a contract that provides benefits on illness. In this contract the level of illness required to qualify for any benefit depends on the contract type and can range from: (i) Critical Illness : benefits are paid out if the policyholder suffers from an illness covered by the contract (ii) Accidental Disability Insurance; The policyholder receives benefits following accidental disability, such as loss of limb or sight. (iii) Income Protection Cover : The benefits are paid out if the policyholder suffers from an illness and is unable to work for a period of time (iv) Long-term Care : The contract provides medical and or nursing care, usually in old age. (v) Whole Life Level Annuity; A contract that provides a regular stream of level payment, which terminate on death (vi) Temporary Level Annuity; A contract that provides a regular stream of payment of level amount which terminate on the earlier of death or survival to the end of a fixed term, also referred to as term annuity.

(2) Life Annuity contract is one where the insurer (insurance company) pays a regular income to the policyholder or another specified person. A life annuity contract provides payments of amounts, which might be level or variable, at stated times, provided the annuitant is then alive. Here we consider four varieties of life annuity contracts:

(a) Annuities under which payments are made for a whole life, with level payments, called immediate annuity (paid at the end of a month, quarter or year)

(b) Annuities under which level payments are made only during a limited term, called a temporary level annuity.

(c) Annuities under which the start of payment is deferred for a given term, called a deferred annuity.

(d) Annuities under which payments are made for the whole life, or for a given term if longer, called a guaranteed annuity.

Whole life annuities annually in arrears, also to as an immediate annuity is one under which the first payment is made every year end as an example. In other words the payments are made in arrears. Although the standard Actuarial term (immediate annuity can be misleading).

The word immediate is used to distinguish these from deferred annuities, where the payments start some years in the future. For instance on reaching age 50, the payments start.

In Zambia and generally the rest of the world, people tend to believe that insurance companies are too “clever” and manipulative when policy holders present claims and that more often than not the claims are not honored by the majority of insurance companies. This perception tends to deter people from buying insurance. I have always disagreed with this perception.

The key to any successful claim is paying attention to the underwriting process before any insurance contract is signed or entered into. The guiding principle here is that the higher the sum assured (benefits to be paid) the more rigorous the underwriting and the higher the chances that the policy holder may misunderstand some contract clauses. Most of us have a tendency of signing contracts before reading the terms contained in the contract document(s).

Subsequently, this tendency makes it difficult for us to make claims from our insurers. The insurance companies are particular and follow contract checklists before any claim payment is made and once any of the contract rules are not met, an insurance company will not pay your claim. Remember that insurance companies main objective is to cover your risks or losses, but at a profit. They are not charitable Insurance underwriters specialize in evaluating the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether even to accept the risk and insure them. Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk.

The function of the underwriter is to protect the company's financial reserves from risks that they feel will make a loss and issue insurance policies at a premium that is commensurate with the exposure presented by a risk.

As part of the underwriting process for life or health insurance, medical underwriting may be used to examine the applicant's health status (other factors may be considered as well, such as age & occupation).

The factors that insurers use to classify risks are generally objective, clearly related to the likely cost of providing coverage, practical to administer, consistent with applicable law, and designed to protect the long-term viability of the insurance program. Each insurance company has its own set of underwriting guidelines to help the underwriter determine whether or not the company should accept the risk.

The information used to evaluate the risk of an applicant for insurance will depend on the type of coverage involved.

For instance, a miner would be required to pay higher premiums to ensure their life, while comparatively a teacher may pay much lower premiums for similar life insurance cover. This is because a miner is at a much higher risk of perishing underground, while a teacher is not exposed to such risk.

The basic transaction of insurance is an exchange that is the policyholder pays a premium or a fee for a contract or policy in return for ater payment enefits from the insurer which is contingent upon death or survival or possibly the state of health of the policyholder.