Sunday, August 12, 2007

Insurance Policy as a Savings Vehicle - cont'd

Essentially, there are two types of non-participating and participating policies for your saving needs. They are:
a) whole life insurance;
b) endowment insurance;

Whole life insurance is a permanent insurance policy. It provides insurance coverage for the entire life of the insured. This means to say that as long as premiums are paid, the coverage continues until the insured dies or reaches some predetermined advanced age (usually 100 years old).

Whole life insurance policy has the following common features:
a) It covers the insured against death; Duration of cover is for life;
b) It also has some form of saving element known as "cash value". This means that the insured can encash the policy by surrendering it after a specified period of time (usually three years);
c) policy lapses if premium is not paid witin the 30 days grace period. However that can be avoided, if policy has acquired a cash value, by activating the non-forfeiture options like surrendering the policy for its cash value or converting it into a reduced paid up policy or extended term insurance policy;
d) policy loans are allowed once the policy acquires a cash value. It is borrowing against the policy's cash value and interest is chargeable;
e) premium is usually a fixed amount payable on a regular basis; It is higher than term insurance.
f) death benefit is payable in one lump sum upon death;
g) total and permanent disability benefit is usually attached and is paid either in a lump sum or in instalments upon total and permanent disability;


Endowment insurance is also a permanent insurance. It has a fixed maturity date which is typically ten, fifteen, twenty years up to a certain age limit( e.g.65).

Common features of such insurance policy are:
a) Duration of cover is for a period specified at the inception of the policy. When this period ends, the cover stops and if the insured is alive, the maturity value ( the basic sum assured + bonus, if any) will be paid to the insured;
b) cash value builds up quickly;
c) non-forfeiture option is available once policy acquires a cash value. Hence insured can avoid having the policy lapses which is possible if premium is not paid within the 30days grace period; d) policy loans are allowed once the policy acquires a cash value;
e) sum assured, plus bonus if any, is paid in one lump sum upon death;
f) a total and permanent disability benefit is usually attached and the sum assured, plus bonus if any, is paid in instalments upon total and permanent disability.
g) premium is a fixed amount payable on a regular basis. It is higher than Term and Whole Life Insurance policies.

I hope you have obtained some good understanding of the above policies by now. These are useful saving vehicles that you can consider. Building a retirement fund is a long haul process. You have to start saving early and investing it over a long period of time.

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