Life insurance products

There are three main types of life insurance products:

a) Term insurance - pays the sum assured on death during the period of insurance. The policy ceases at the end of the period. There is no savings in this policy.

b) Whole life insurance - pays the sum assured on death. The policy can be continued for a lifetime. The policyholder has the option to terminate the policy and receive a cash value.

c) Endowment insurance - pays the sum assured on premature death or on the maturty date (i.e. at the end of the period of insurance). This policy combines the term insurance together with a savings element that accumulates the benefit payable on maturity.

The premium paid under whole life or endowment insurance is higher than term insurance. The excess premium, less charges, is accumulated to produce the cash value or maturity benefit. Due to the high charges, the yield on this savings portion is generally poor.

If you buy a participating or with-profits policy (i.e. whole life or endowment policy), your policy will earn an annual bonus that depends on the profits of the insurance company. This bonus is added to the policy. The yield on a participating policy is marginally higher, but is still low compared with other financial products.

It is better to pay a separate premium for the term insurance, and invest the remaining savings in a low cost investment fund, which can produce a higher yield on the investments.

The annuity is a different product. I shall explain its features separately.