Oran Hall | Life insurance companies as option for personal financial solutions

Although protection remains the principal reason for life insurance, life insurance companies have steadily added to the death benefit other benefits such as investment solutions, inflation protection, funding for important life goals, and funding to meet the expenses brought on by critical illnesses.

Life insurance provides cash to settle the estate of and bury the deceased. It also replaces the income lost due to the death of the policyholder. These funds often provide the means for beneficiaries to complete their education, to meet important life expenses, to complete payment for important assets, and to provide a cushion for vulnerable family members, for example.

Life insurance companies are generally public companies, some of which are listed on stock exchanges. They are owned by their shareholders, who are not under any obligation to do business with them. They participate in the operations of the companies by voting at general meetings on important decisions, and receive dividends, which are paid out of the profit.

The ultimate responsibility for the operations of a life insurance company rests with its board of directors, which is responsible for policy and delegates day-to-day management to the managers, who ultimately report to it.

Some life insurance companies are mutual companies, which are akin to co-operatives. There are currently none in Jamaica.

Life insurance companies are regulated by the Financial Services Commission, (FSC0) under the Insurance Act 2001 and Insurance Regulations 2001. The primary consideration of the FSC as supervisor and regulator of the insurance industry is the protection of the interests of the policyholders through its Insurance Division.

The FSC pays particular attention to the solvency and capital adequacy of life insurance companies to ensure that policyholders are protected. It also ensures that industry players follow good corporate governance practices as they owe a duty of care to their clients.

At the same time, policyholders can take steps, including the following, to protect themselves:

• Check the identification of sales representatives/financial advisers and verify their credentials with the company;

• Find out about the company’s operations and performance by reading its annual report;

• Seek out a qualified representative of the company to explain product features and answer questions; and

• Buy only policies that align with their needs.

The two main types of life policies are whole life and term. Whole life policies offer coverage for the whole life of the policy holder until death. Term policies cover policyholders for a fixed period, after which they terminate without any benefit being paid. Some policies, however, are renewable, generally at a higher premium due to the higher age of the policyholder then, and some can be converted to permanent insurance.

There are many versions of these policies to meet the various needs of the wide-ranging market for life insurance products. Generally, in managing their risks, insurance companies want to know that prospects are insurable and thus require that approved medical doctors vouch for the good health of the prospects.

But there are non-medical, or coupon, policies which do not require prospects to do a medical examination as a condition to be insured. They provide ready cash in the event of certain diagnoses, like stroke, heart attack, cancer and paralysis, and personal accidents. There is a maximum coverage, so individuals may not be able to get as much coverage as with other types of policies.

There are inflation-linked policies, equity-linked policies, and policies that allow policyholders to increase their coverage by a pre-determined percentage without proof of insurability, but there is a ceiling on how much the coverage may ultimately increase relative to the original sum insured. In some cases, policyholders may opt to reduce their coverage.

Most of the above features are common to universal life policies, which provide protection, savings, and investments. Because they are essentially term policies which include an investment component, they tend to give high coverage for the premium dollar but leave the investment risk with the policyholder. Although the premium remains fixed, as the mortality charge increases in later years, any shortfall is withdrawn from the investment portion of the policy to cover it.

Generally, equity-linked policies give the insured the option of selecting the investment funds into which a portion of the premium is to be invested. While giving the policyholder more say, they transfer the risk to the policyholder as there are no guarantees on how well the investments, managed by the insurer, will do.

For the more risk averse, there are policies that are linked to the more conservative instruments like interest-earning financial instruments.

With traditional insurance, a portion of the premium is invested and cash values accumulate on the policy, oftentimes such values being guaranteed by the insurer.

There are policies that provide funding for business continuation and others that aim to satisfy several needs in one product. And beyond selling insurance products, life insurance companies sell annuities, which provide a steady and reliable stream of income for retirees.

At the end of the day, individuals should only buy insurance that satisfies their needs and avoid withdrawing the accumulated cash and investment values so they can keep growing tax-free.

- Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email: finviser.jm@gmail.com