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Different types of life insurance
In Hong Kong, there is a wide variety of life insurance contracts available. You need to distinguish among the various products offered by life insurers by examining what the products provide. Some of the more common types of life insurance are briefly summarized below.
A “Term Life” policy pays a lump sum upon the death of the policyholder. It does not pay dividends. Term policies are of a fixed duration: 10 or 20 years, for example. If no claim is made, the policy will cease after this time. It provides a protection function but has no cash value.
A “Whole Life” policy can provide a cash value for the policyholder during the policyholder’s lifetime, and also provide a lump sum plus dividends to the beneficiary upon the death of the policyholder. Premiums are usually paid to the insurer at regular intervals, and the premiums are then invested by the insurer to generate dividends for the policy. Therefore, a whole-life policy has a savings and protection function.
An “Endowment” policy pays out a lump sum on an agreed date (whether or not the policyholder has died), thus providing a savings function for the policyholder. It also pays a death benefit should the policyholder die before the payout date, thus providing a protection function as well.
Investment-linked Assurance Scheme
An Investment-linked Assurance Schemeis a Life Insurance Policy with benefits linked to the performance of selected investment options, but subject to the credit risk of the insurance company. If the return of the investment options is based on the performance of a corresponding underlying fund selected by the policyholder, then the return on investment is calculated with reference to the fluctuation of the performance of the underlying funds selected by the policyholder. The insurance company owns these assets and the policyholders do not have any rights related to, or ownership of, the underlying assets, but do have ownership of the Insurance policy.
The policyholders must be aware that part of the premium is used to pay for insurance protection, as well as any fees and charges imposed by the insurance company. The rest of the premium is allocated to the investment options chosen by the policyholder.
These policies offer a lump-sum payment if the policyholder is permanently disabled due to an accident. These are normally attached as additions to whole life or endowment plans.
Income Replacement Plans
These provide a percentage of the policyholder’s salary to replace his income if he is ill and cannot work for a prolonged period of time.
Also offered are hospital income plans. These offer a fixed cash sum for each day spent in hospital, to help meet the usual household bills which still need to be paid.
These policies offer a lump sum if the policyholder contracts a critical illness, such as cancer or heart disease. Most dread disease policies also provide benefits in the event of death. It is quite common for these kinds of policies to be added to whole life or endowment plans in the form of a rider.
The above provides only a brief outline of some common types of life insurance that are available in the market. You must read carefully the actual terms and conditions in the policy before buying it.