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.

Insurance Policiy as a Savings Vehicle

Do you have problem saving up? Read this if you are one of those who have no discipline to save.

The saving tips that I am about to share with you is a Forced Saving Program through the use of insurance policy.

Life insurance as a useful savings vehicle can come in two form:
a) non-participating policy with cash value
b) participating policy

A non-participating policy refers to a life insurance policy that does not share in the profits of the insurer i.e. the policy-owners of such products are not entitled to any bonus payment by the insurer. Such products are also known as without profits policies. Only non-participating policies that acquire cash value has a savings element. Term insurance is also a non-participating policy but it is purely for death protection purpose and does not have savings element because it does not acquire cash value.

Participating policies, on the other hand, refer to life insurance products that share in the profits or surplus of the insurer. Such products are also known as with profits policies and the policy owners receive bonuses from the insurer. The bonuses are declared on an annual basis and are guaranteed once they have been declared. Participating policies acquire cash value too.

What is Cash Value? Cash value (also known as "Cash Surrender Value" or reserve) is the amount of money, before certain adjustments, that the policy owner will get in the event that he surrenders his policy to the insurer for cancellation. Cash value arises as a result of the level premium system adopted by insurers. During the early years of the policy, the premium paid covers more than the cost of insurance protection provided by the company because the risk that the insured will die is lower. In the later years of the policy, the same premium covers less than the cost for the insurance protection by the policy as the insured grows old and is more likely to die. The extra premium collected in the early years by the insurer is set aside partly to form the policy's cash value. As time goes on and premiums continue to be paid, the cash value grows.

A word of caution: Most of these policies don't start to build decent cash value until their 12th or 15th year. Usually, it will breakeven on the 10th year i.e. total premium paid = cash value accumulated. So if you surrender in the first five years or so, practically most of the money you put in will be down the drain. Hence, if you buy one, be prepared to pay into it for a very long haul to yield a reasonable return for your retirement. Otherwise, I think you should just forget about it.

Surplus from the participating policies is the amount by which the insurer's assets exceed its liabilities. Surplus usually arises from:
a) bonus loading on participating policies;
b) the profits made by the insurer from all classes of business

Returns from these policies are usually in the range of 3 to 5%.

Forced Saving Program

Do you have the financial discipline to save? If you don't and if you always find that money is not enough, you may want to consider taking a forced saving program to ensure that your retirement funds are well provided for in your golden years.

The forced saving program that I would like to introduce here is an insurance product with savings element.

Life insurance, namely, Whole Life and Endowment Insurance are useful savings vehicles. These policies acquire cash value over the years which the policy owner can tap for various purposes such as taking a policy loan or surrendering the bonus to meet some urgent needs. In addition, if it is a participating policy, it pays annual compound bonuses on the policy which are tax free. Such policies enable the policy owner to enjoy capital growth on their investments.

As the name implies, Whole life product is designed for a longer term and perhaps for your entire life. Premium payments purchase protection against the risk of premature death and also allow you to build a cash reserve -- the savings element.

Generally, the face amount of the policy and the annual premium are fixed and the cash value of your policy increases, so the amount of pure risk protection decreases over time. You could look at a whole life policy as a combination of decreasing term life insurance and an increasing savings fund. Part of your premium goes for the death benefit and the rest is like an addition to an investment account.

Also be fully aware that, unlike a savings account, the savings element of a life insurance policy is usually not immediately available to you. You may have to pay surrender charges if you withdraw funds early in the life of the policy. You should carefully consider how much you are paying for the "savings" part of the policy and how soon you might need these funds.

I will elaborate more about the products in the next post.