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The Australian Life Insurance Industry was once largely made up of traditional permanent plan life assurance policies. While these options may still prove popular for certain business insurance options, Whole of Life plans are no longer offered as personal insurance and have been replaced by Term Life Insurance.
There are two main types of traditional policies that were widely used in previous years:
Life Assurance policies are no longer available in Australia and has been replaced by term life insurance. Receive a free quote for Term Life Insurance options.
In comparison to widely used term insurance policies of today, the features of traditional policies are quite simple in nature.
What is a Surrender Cash Value?
How Does Surrender Cash Value Work?
What does this mean for policyholders of traditional plans?
The profit earned annually on traditional life contracts on top of the sum-insured is called a reversionary bonus. This bonus is declared annually and is guaranteed to be paid at the maturity of the policy. That added bonus could help protect the policyholder against ongoing inflation by keeping up with the original value of the sum-insured.
The payment provided when a reversionary bonus is actually cashed is significantly smaller to the perceived value due to the time value of the money till the actual date a claim would be expected. The bonus is subject to variance according to the actual companies financial performance and premium (a higher premium will yield a higher bonus). This makes the process of comparing different permanent contracts extremely important.
Terminal bonuses have also been added on permanent policies to represent the profit that has grown out of capital gains on investment. This bonus is not guaranteed and will fluctuate subject to the investment market. In comparison to reversionary bonuses, terminal bonuses cannot be cashed in until the policy has reached maturity.
Not all traditional policies offered bonus features. While these were more affordable, they did not offer the policy owners any defence over inflation, as the sum-insured remained constant over the life of the policy.
While investment-linked policies still prove to be popular for some businesses, the rate of inflation on personal policies saw them become less and less popular. Without the benefit of being able to predict how inflation will change into the future, what initially looks to be a strong source of retirement funds is quickly eroded by inflation. This was coupled by the fact that the investment of life insurance company funds used generally be in fixed interest securities which did not perform well in an economy experiencing rising inflation and interest rates.
The decline of popularity of whole life policies for personal cover gave rise to unbundled contracts where the insurance, investment components of policies were now separate and more visible to the traditional policies.
The benefit of unbundled policies is both through their flexibility and ability to have all key features visible;
With the features now unbundled, applicants now have a range of different combinations of how the investment and insurance of the policy is managed.
Investment account policies are policies where a portion of the life insurance premium is directed into a linked investment account, earning an interest rate declared by the life office. This rate will have to take into account the performance of the fund and the amount of capital required for capital guaranteed. Applicants should be aware that these types of policies will often come with an exit fee on funds which will be deducted from the policy sum-insured once the policy expires or is terminated. This exit fee will be quite high in early years but will level off further into the life of the policy.
The return on Investment Account Policies is guaranteed to policyholders.
NOTE: Applicants must be made aware of this exit fee at the time of application.
In comparison to investment account life insurance policies, investment linked policies invests the premium to purchase units in different investment portfolios including capital stable, equity, property, mortgage and discretionary units.
It is up to the policyholder to decide what kind of portfolio their funds go into and as such, the savings will fluctuate according to those investment units. As the investment return is not guaranteed to policyholders, they are taking a risk on the performance on the unity.
Similarly to Whole of Life policies, an investment-linked insurance policy will not lapse until all of the equity (funds accumulated after exit fees) has been used to pay the charges and costs of the policy.
Variable life insurance is a type of permanent life insurance that provides ongoing protection to the policy owners beneficiary following their death. Also known as “Variable Universal Life Insurance” it is a form of unbundled life insurance where there are flexible terms and investment options to the policyholder that can be taken out within the company’s portfolio. The cash value that accumulates can be invested by the policy owner into a variety of accounts offered by the insurer including stocks, bonds, bond funds, equity funds and money market funds. This type of insurance is no longer available in Australia.
Note: Variable life insurance is no longer available in Australia
The key difference in variable life insurance to other types of permanent life insurance options is that the policyholder has far greater flexibility in how they are able to manage their policy and invest their cover.
A traded policy is a life insurance contract that is purchased from the original owner for a small margin premium over the policy surrender value. These policies are generally purchased by settlement brokers to sell to large investors. A settlement broker will have a set of criteria required for the policy to be accepted for trade.
The surrender value is the amount of money that the life insurance company will pay to the policyholder when they voluntarily terminate the policy before it reaches maturity or the event they are insured for occurs. This value is the savings component that has accumulated in the fund.
Quite simply, traded life insurance policies are a secure investment available at a discount price.
Whole of life and endowment policies generally come with quite high establishment fees that level off later into the life of the policy. An investor looking to purchase a traded policy will not be weighed down by these charges and is purchasing the policy when it will increase in value greatly over the remainder of the term.
While the primary purpose of providing a benefit payment in the event that the policy owner dies or suffers a terminal illness remains the same for both Life Assurance and Life Insurance policies, the two types of cover are significantly different from one another. Here are some key differences between traditional life assurance policies and life insurance of today;
Are the premiums in
Term life insurance | Life assurance | |
---|---|---|
Are my premiums invested? | No | A portion may be invested |
Is there a cash value accrued when the policy expires | No | Yes |
Is is possible to borrow from the cash value to pay premiums? | No | Yes |
Are premiums expensive? | Generally cost less than life assurance | Generally costed more than a term life insurance policy |
An adviser can help you find cover from trusted life insurance brands.
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