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So, you’ve read all the articles that remind you how important life insurance is, and you’ve started to load up on product brochures to compare various policies. But as you research, you may come across many different life insurance terms. What is a participating policy, for instance, and how do you know how much you’ll get when the policy ends? So, don’t let life insurance jargon stress you out. We’ve got a solution for you.
Welcome to the first instalment of the A-Z List of Life Insurance jargon. In this first article, we go through a list of 8 common terms and phrases you might hear when talking about life insurance. This will be useful for anyone who wants to understand the lingo used in this policy, but it’s also great for agents and brokers who want to make sure they’re using language their customers can understand. With these eight terms, you should know enough about any insurance product brochure. Read on to find out more!
What is whole life insurance?
A whole life insurance policy, also known as traditional life insurance, is a plan which covers you for your entire lifetime as long as you pay the premiums. Whole life insurance pays the sum assured and any accumulated bonuses, providing permanent death benefit coverage for the insured. If a Total Permanent Disability (TPD) benefit is included, the insurance will also pay out all sum assured amounts.
It also accumulates cash value that the insured can withdraw or borrow against if they terminate the policy early. The insurance provides long-term savings as the insurer invests on your behalf. You can pay premiums throughout your life, although some plans allow you to opt for a limited payment period.
Now that you understand what’s whole life insurance, let’s find out all the common terms to help you assess the product you are purchasing:
What is a participating versus non participating policy?
You might have seen the term ‘participating policy’ when you read the brochure. A participating policy allows you, as a policyholder, to share any profits made by the insurance company’s participating fund. These profits are shared with policyholders in the form of bonuses, sometimes known as dividends.
A participating policy is also known in the industry as a with-profit policy. Participating policies have guaranteed bonuses, although the profits can fluctuate depending on how the fund’s investments are performing, how many claims are paid out by the fund and expenses incurred. In non-participating policies, there are no shared profits, so there are no dividends paid to the policyholders. Whole life insurance policies come in both participating and non-participating policies.
What is sum assured?
The next common term on a product brochure is ‘sum assured.’ Simply put, the sum assured is the minimum guaranteed amount that will be paid to you when a claim occurs. This claim is paid when an event under coverage (such as death, critical illness or disability) happens.
For some policies, the benefit payable when a claim arises might be different from the total sum assured. You will need to check your contract or ask your agent for more details before you purchase.
What is surrender value?
The next term that commonly appears on the product illustration is ‘surrender value’. It’s sometimes also known as the surrender cash value, although there are some minor differences between the two. As the name suggests, the surrender value is the amount of money you, the policyholder, can get when you ‘surrender’ the policy. To surrender means to cancel and cash in the policy. If the policy has a savings feature, you’ll be able to surrender your policy and receive the remaining cash value minus any surrender fees. For many policies, surrender value is not immediate and only builds up after the first few years. However, the product illustration will clearly show when the surrender value accumulates.
So what is cash value? The cash value is the cash portion held in your insurance policy.
The cash value, also known as the account value, is the sum of money that builds inside a cash-value–generating whole life insurance policy. For investment-linked (ILPs) and participating policies, the surrender cash value depends on the fund’s current value of investment units.
Your insurer allocates funds to the investments through the premiums you pay and then credits your policy (going into your cash value) based on the performance of those investments. Next, let’s look at another kind of monies you can get.
What is maturity value?
If you are purchasing whole life insurance, your insurance will expire at a certain age or if you pass on. In that case, when the policy coverage expires or ‘matures’, beneficiaries can receive the face amount of the policy. This refers to the amount of death benefit. Therefore, maturity value refers to the amount of money given to the beneficiary when the policy expires. Because of this maturity value, whole life insurance is used for legacy planning, especially if you are a sole breadwinner. It is an excellent way to ensure that your family continues enjoying the same financial protection even without you.
Certain life insurance policies may reach maturity when the insured reaches a certain age, such as 100. For instance, the Singlife Whole Life insurance provides coverage up to 75 years old. In this case, the proceeds payable go to the insured upon the agreed maturity date. A maturity date is an agreed date on which the policy ends, and the insurance company pays out the applicable benefit amount.
It’s important to note the difference between cash value and face value. Think of the cash value of a policy as a savings account. It can fluctuate if there is an investment component to the whole life insurance. You can access the cash value when you cancel the policy. However, your face value is the amount of your death benefit or how much your policy is worth. So while it can also increase depending on your cash value as it accumulates, you can only access this amount when the insurance matures, or if you pass on. In other words, if you surrender your policy before it reaches the maturity date, you will only get your cash value, including any guaranteed bonuses. In some cases, your cash value might be less than the face value of the policy. In other words, it’s usually not a good idea to cash in your whole life policy before it matures.
What is Reversionary and Terminal Bonus?
Bonuses are additional payments that an insurance company gives its policyholders of a participating policy over and above the assured income. A participating policy has both guaranteed and non-guaranteed bonuses.
There are two types of non-guaranteed bonuses: revisionary and terminal ones. These bonuses are profit made by the insurance company and affect your policy’s cash value.
A reversionary bonus is declared as a percentage of the chosen sum assured and added annually to your policy. Once added, these bonuses are guaranteed benefits in your policy.
The bonuses are usually paid in full when a claim is paid, or the policy reaches maturity. However, when you surrender or cash in the policy early, only a proportion of the reversionary bonuses will be payable since you did not hold your policy until a claim arises or to its maturity.
Some participating policies provide terminal bonuses, payable when you surrender the policy, make a claim that is paid or when the policy matures. These are separate from any reversionary bonuses.
Finally, regarding the non-guaranteed portion, some participating policies may also provide non-guaranteed benefits in the form of cash dividends paid out on declaration.
Life insurance jargon too confusing? Contact us for help
We know that life gets complex and so we’re here to help. Instead of figuring out all the terms on your own, fill in the form below and let our experienced financial advisors guide you. Purchase your life insurance without any doubts. And if you’re still lost, bookmark our blog for the next part, where we’ll run through an A-Z list of other common terms on insurance products!
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