Everything you always wanted to know about life insurance but were never afraid to ask. Paraphrasing the title of Woody Allen’s film (and with a somewhat less suggestive theme), we return to our blog with a question to which you may not know the answer.
How many types of life insurance are there?
The different types of life insurance depend on whether the payment of the amount agreed in the contract depends on the death or survival of the insured. Basically, there are four modalities: risk insurance in the event of death, savings insurance in the event of survival, mixed insurance that combines the two previous ones, and income insurance.
Each of these types of life insurance has its own characteristics. Let’s see what each one consists of.
Risk insurance is a type of life insurance in which death is insure and may include other guarantees such as the permanent disability of the insure or additional capital in the event that death or disability is the result of an accident.
The contract capital is pay if the death or disability of the insure occurs before the end of the term of the insurance. The duration of these insurances is therefore limit by a series of years (5,10, 15) or until reaching an age, with 65 being the most common age limit for coverage.
If the insured person survives this period, the insurance is cancel, leaving the premiums paid in favor of the insurance company. They are normally temporary insurances that cover the risk of death or disability as long as they occur before the end of the contract. In this type of insurance, the risk component prevails over other variables. Its duration is one year, tacitly renewable up to a certain number of periods. Its cost is usually not very high and allows high coverage to be contract. They are usually contract to protect mortgage obligations, but above all as additional protection to protect the family’s lack of income derived from death or disability.
In risk life insurance, the premium or cost of the insurance is annual and is calculated based on the age of the insured and the capital chosen or insured in the policy, so that the older the insured and the greater the insured capital, the greater it will be the cost of insurance.
There is also the possibility of taking out risk insurance without setting a term and establishing the end of the insurance when the insured person dies (whole life). These insurances are used by those who always want to leave an amount, capital or sum insured, when a disabled child dies or so that their heirs can deal with inheritance tax, etc. By covering a certain event such as death at any time, it is difficult to consider them as risk insurance. On the other hand, the insured capital is usually small and it is a product that is not widely used in the market.
Savings life insurance are those destined to constitute a capital that the insurance company will pay to the insured at the end of a term established in the policy in the event that he lives. The purpose of these insurances is to save in the medium or long term to complement retirement benefits or to accumulate capital to face future situations.
In this type of insurance, its tax treatment is especially relevant, which will depend on the legislation of each country.
The premiums of these insurances can be unique or periodic.
In single-premium insurance, capital is provide at the beginning and a return is guarantee at the expiration of the term, which is usually at least one year, the most common being 3 to 5 years. Longer term, greater profitability, they are usually products invest in Fixed Income that prioritize Security over Profitability.
In periodic premium savings insurance, a monthly or quarterly contribution is agreed from time to time with a guaranteed annual interest rate to gradually build capital at the expiration of the contract. Likewise, it is common for these products to also allow extraordinary contributions.
Savings life insurance always guarantees the insured capital made up of the premiums paid plus a guaranteed return on the policy. You always get what you save plus the guaranteed agreed return.
For this reason, life savings insurance has become the most reliable and safest instrument for saving in the long term. There is no financial or banking product that can guarantee profitability at 25 or 30 years. For this reason, all products aim at saving for retirement are support or implement through life insurance.
Within this modality, it is worth highlighting the Insure Pension Plans (PPA) and the Individual Systematic Savings Plans (PIAS) and the Unit Link, the latter are the only savings life insurance policies that do not guarantee the investment, since the contribution of the client it is invest in a basket of funds and the risk of the investment is entirely with the client or insure.
They guarantee the payment of a capital to the beneficiaries at the death of the insured or at the expiration of the insurance if the insured lives on that date.
Mixed insurance combines risk insurance and savings insurance in the same contract, so that the insure person is cover in the event of death (in which case the beneficiaries will receive compensation) and is guarantee a benefit if he or she survives the stipulate age.
Annuity Insurance is also often refer to, whereby by contributing a single capital or paying a premium for a certain period of time, the insure is guarantee an income.
Income can be:
- Life Annuities: The insured receives the annuity until the moment of his death, with the insurer assuming the longevity risk of the insured
- Temporary rents: A period in which the Rent will be receive is establish at the signing of the contract
In both modalities, it is possible to establish the reversion of the payment of the rent to a family member in the event of the death of the insured. Life annuities have had an important development in recent years, aimed at older people who have capital and want to convert it into a monthly or annual income while they live.
The tax treatment of income is very interesting and more and more people are interest in contracting this type of life insurance.