At ValueChampion, our goal is to help you find the best financial products for your needs. With our roundups and guides, we strive to analyse and compare financial products and distill complex information into easy to understand terms. As one of the most complex financial products out there, life insurance requires plenty of research and analysis to fully understand. While policy documents have some definitions included to help you understand the policy, there are many terms that are left unexplained. To help you break down different policies easier, we identified, compiled and explained some of the more confusing terms found in life insurance policies.
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Age Next Birthday
Your age when you purchase a life insurance policy is one of the most important factors determining your premium. However, different insurers use different definitions for age. Commonly, you'll find insurers using "ANB", or Age Next Birthday. This simply means your current age plus 1 year. So if you are currently 40 years old and you are looking at a premium table, you will be paying premiums for age 41.
Age definitions aren't limited to life insurance policies either. You will also find ANB and other age definitions in health and endowment policies.
If you are looking at participating policies, you'll find that they accumulate a cash value. The cash value is the sum of money that builds up in your policy, typically after a few years. Another way of thinking about it is the savings component of your policy. It is the amount of money you will get paid if you surrender your policy early.
The illustrated rates are projected returns set by the Life Insurance Association (LIA) that are deemed as achievable by an insurer's life funds over a 10-year horizon. Currently, they're set at a lower rate of 3.25% and a higher rate of 4.75%. They are not the actual returns of your policy, nor are they the upper and lower limits of the insurance company's investment performance.
A beneficiary or nominee is the person who will receive your life insurance payout. You can name multiple beneficiaries and they can be anyone you want, whether it is your partner, child or other family member. You may also be able to designate certain amounts to different people. For instance, you may state that your spouse will get 60% of the life insurance payout and your child will receive 40%.
There are two types of beneficiary nominations. The first is the trust nomination, where the policyholder will lose all their rights to the ownership of their policy and will need nominee agreement to revoke nominations. On the other hand, a revocable nomination gives the policyholder the right to change, add or remove nominees as they please and without consent.
Participating vs. Non-Participating
A participating policy is a policy that takes your premiums and puts them into an insurer's investment fund. Depending on the performance of the fund, you may earn returns on those premiums in the form of cash bonuses. These bonuses will be added to your sum assured. There are two types of bonuses in a participating policy: reversionary and terminal.
Reversionary bonuses are bonuses that are added to your policy at the end of each policy year. Once they are added to your policy, they can not be taken away. The terminal bonus is calculated when your policy matures or when you make a claim. As previously mentioned, both bonuses are dependent on the performance of the fund.
Non-participating policies are policies that do not invest your premiums into an investment fund. These policies provide guaranteed returns of the sum assured and are less risky than participating policies.
For some life or endowment plans, you'll be able to convert to something called a "paid up policy". A paid-up policy is a policy that reduces your sum assured in exchange for you not paying any more premiums. You will only keep the bonuses you received before you chose to switch your policy to a paid-up policy.
When you look at a life or endowment insurance brochure, you'll notice that there are hypothetical examples describing the policy. This is called a policy illustration and is used to show the benefits you can expect to get from the policy, along with the cost and charges. Policy illustrations use the illustrated rates to show the hypothetical payout of the policy.
As with most bills, once you stop paying your insurance premiums, the service will be cut off. Once you stop paying premiums, your policy will lapse and your cash surrender value will be used to pay for those missed premiums. Furthermore, the policy will no longer provide any coverage. However, after a certain period of time and if you meet certain conditions, you will be able to reinstate the policy and receive full coverage again.
The surrender value of a policy is the sum of money you will receive if you cancel your life insurance policy before it matures. Oftentimes, there will be a penalty associated with cancelling your policy early, so your surrender value will be less than your sum assured and any accumulated bonuses. The formula for the surrender value is the cash value - surrender charges. The total payout you get will receive will be made up of the guaranteed portion and the non-guaranteed portion that is made up of any accumulated bonuses.
Example of Surrender Values for Aviva MyWholeLife Plan III
|Surrender Year||Premiums Paid||Surrender Value (Guaranteed)||Total (Lower Rate to Higher Rate)|
|Source: Comparefirst.sg; Example policy is whole life policy with 25-year premium term with death benefit of S$2,500,000; lower and higher rates are illustrated rates of 3.25% and 4.75%, respectively.|
As you can see in the above example, your surrender value will be less than the total premiums you paid even after you stop paying premiums on the 25th year onwards. This is why you see so many insurers warning you to remain committed to a policy. You should note that while Aviva's surrender values are as shown above, different insurers have their own surrender fees and will result in different values.
Waiver of Premium
A waiver of premium, or premium waiver, is commonly found as an optional add-on to your base policy. A waiver of premium will cancel all future payments if an insured event happens to you. An insured event could be anything from losing your job to becoming disabled or getting a critical illness. Even though you stop paying premiums, your policy will still keep going.
Understanding the Language Leads to Better Decisions
It is much easier to make the right decision when you understand what you are reading. Getting past the jargon can help you decipher between a solid policy or a policy that simply has good marketing. Hopefully, this guide helped explain terms you may have been confused about. To learn more about life insurance and related products, check out our guides below.