Organization : Malta Financial Services Authority
Type of Facility : Life Insurance
Country: Malta
Website : http://mymoneybox.mfsa.com.mt/pages/viewcontent.aspx?id=126
Life Insurance :
Life insurance offers valuable financial protection in the event of your early death to family members dependent on your earnings.
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But it may also be a means of saving. This combination of protection and saving makes life insurance unlike any other financial product. Some policies protect, some help you to save and some do both.
A life insurance policy is a contract between the policy holder and a life insurance company where the latter promises to pay the legal heirs or a designated beneficiary a sum of money upon the death of the person whose life is insured.
The life insured need not be the policyholder but can be a third party provided that the policyholder has a lawful “insurable interest” in the life to be insured at the time of commencement of the policy.
This means that for a number of years, you have to pay an annual premium to your life insurance company. When you do a life policy, you have to be sure that you would be able to meet your annual obligations on time and in full. In normal circumstances, you would not be able to obtain the full value of your insurance premium paid over the years if you surrender your policy before its maturity.
Paying for your life insurance policy usually takes two basic forms:
Single premium: a lump sum is paid at the beginning of the policy. No other payments are made for the whole duration of the policy. Some policies may allow you to “top-up” the amount at particular intervals during the life cover.
Periodic premium: this can be annual or monthly. A monthly payment would normally incur added charges to the policyholder as a result of added administrative procedures for the insurance company.
Remember that if you decide to change any aspect of your policy at any time during the duration of the life cover, the insurance company may reserve the right to charge you a small fee to cover administrative expenses.
Who may have insurable interest?:
The most common form of insurable interest is that which a person has in her / his own life and that of her / his spouse.
Other examples of persons who may have an insurable interest are:
A person who is likely to suffer financial loss as a result of the death of some other person;
A person has an insurable interest in the life of a person on whom he depends, either wholly or partly, for maintenance and support;
A company on the life of a senior employee or shareholder;
A partnership on the life of a partner.
Life insurance policies are designed for persons with dependents, business people, self-employed persons, professionals, partnerships and employers who may wish to protect their enterprise against death of their key persons.
I have a life insurance policy and in the event of my death, I want a specific person to benefit from the proceeds of my policy. Is this possible?
Under Maltese law it is possible for a policyholder to designate one or more beneficiaries to ensure that the policy pays out quickly and directly to where you want the money to go.
By designating a beneficiary under a life insurance policy, the proceeds payable bypass the law of inheritance and this ensures that the process of getting the money to a designated beneficiary (ies) will, as a result, be significantly reduced.
Beneficiaries may be designated:
a) secretly by the policyholder – in which case the beneficiary will be unaware of this appointment, or alternatively;
b) the beneficiary may be asked by the policyholder to accept the designation. Once a beneficiary has accepted the designation in writing this will grant the beneficiary the rights under the policy as predetermined by the policyholder.
The policyholder predetermines the rights of the beneficiary(ies) under the policy. The life insurance company will then follow the policyholder’s instructions and execute these wishes accordingly.
It is pertinent to point out that all designations of beneficiaries must be specified in the policy. The designation of a named beneficiary can be made either in the original contract that is at the onset or in any subsequent amendment to the policy by way of an endorsement.
In case of a spouse or children of the policyholder, the designations of such persons must also be specified in the policy but such persons need not be named. Unless otherwise stated in the policy, in such cases the spouse and children shall enjoy rights to the proceeds in equal shares.
If no beneficiaries are designated under a life insurance policy, then any proceeds become payable in accordance with the law of inheritance.
Can the name or details of a beneficiary be changed?:
The policyholder may revoke or vary the terms of any designation of a beneficiary at any time during the term of the policy. The revocation or modification by a policyholder of a designation of a beneficiary may not however be made by means of a will but the policyholder is required to inform the life insurance company about his/her intention to change or vary the designation of beneficiary under his/ her/ policy.
The heirs of the policyholder may not revoke the designation of a beneficiary after the death of the policyholder. The proceeds and any benefit arising from a contract of insurance, including any surrender value, are due to the beneficiary and form part of his estate, whether or not such beneficiary is aware of such designation. Upon becoming aware of the fact that the policyholder has passed away, the insurer shall inform the beneficiary of his entitlement.
A policyholder may not however revoke or vary the designation of a beneficiary who has accepted the designation. In such instances the written consent of the designated beneficiary would be required.
How can life insurance protect my family?:
Loss of income and problems paying debts or meeting tax liabilities can result from loss of life. To help with these costs there are three basic types of life policy – term insurance, whole life insurance and endowment insurance. All these provide you with protection by paying a lump sum on death. People on a limited income may find that term insurance is the best buy. The term (period of cover) can be chosen to cover the time when children are growing up and expenses are high.
Term insurance (or “temporary insurance”) gives you financial protection if you die within a specified period known as “the term”. This period might be 10, 15 or 20 years although you can arrange policies to cover you for periods as short as one month. If you are alive at the end of the term no payment is made and there is no surrender value – meaning that if you stop paying the premiums the cover ceases and there is no refund of premiums paid.
An endowment policy gives the best of both worlds – protection and saving. Although dearer than term or whole life insurance it will help your family’s finances should you die, while at the same time it is a method of long-term saving because it also pays a sum of money if you survive the period of cover.
Whole life insurance gives more extensive protection. You know your family is financially protected whenever you should die.
Some families find a regular income more useful than a lump sum. For them a family income benefit policy could be best.
Can you give me more information on term insurance?:
Term insurance is the cheapest form of protection and it can offer high life insurance cover for a low premium. This can be ideal if you have a limited income. Cover can usually be arranged to cover just one person, but in some cases cover will also be available for spouses/partners in the same policy.
There are different types of term insurance:
1. Level Term:
You are insured for the same amount throughout the agreed term.
2. Renewable Term:
You have the option, after a specified period (usually 5 years) to take out a further term policy without the need for any further evidence of health, providing the policy will not continue beyond a certain age (often 65 or more).
3. Convertible Term:
You can convert the policy to a whole life (see below) or endowment (see below) insurance without giving further evidence of your state of health. If you decide to convert, the new policy will usually cost the same as a normal whole life or endowment policy based on your age at the date when you exercise the option. If you have a young family and a limited income these policies might be best. Not only do they provide cheap life cover at the outset, but they give you valuable options in later years if your income has risen or your health has declined.
4. Decreasing Term (Loan Protection Assurance):
The sum insured reduces by a fixed amount each year, decreasing to nil at the end of the term. The premium will normally stay the same throughout the term. These policies are usually used to cover a home loan or other loan as they pay any outstanding balance of the debt if you die early. Remember, though, at the end of the term nothing is payable and there is no surrender value.
5. Increasing Term:
The sum insured and premium increase each year by a fixed percentage of the original sum insured. These policies are designed to increase your insurance protection as your earnings increase.
6. Family Income Benefit:
If you die during the term of the policy a regular income is paid to your dependants for the rest of the term. The income can be paid monthly, quarterly or yearly. Some policies provide an income which increases each year at a fixed rate – say by 3% or 5%.
How can I save with a life insurance policy?:
The long-term nature of life insurance allows you to make clear plans for long-term saving. Life insurance companies have long and wide experience of successful investment as well as providing protection in the event of your early death.
1. Endowment insurance:
This both protects your family and saves for the future. Endowment policies can be issued with or without profits or can be unit-linked (see below). You pay premiums for an agreed number of years – say 10, 15 or 20. At the end of this time you receive a lump sum, which is either the sum insured together with bonuses in the case of a with-profits policy, or – with unit-linked endowments – the lump sum is the return of all money invested together with the investment growth. If you die before the maturity date the insurance company will pay the sum insured – plus any bonuses applicable so far.
2. With and Without Profits:
A with-profits policy lets you share in the profits made by the insurance company from the investment it makes. These profits are usually added to your policy as an annual bonus and once they have been added they cannot be taken away.
The amount of bonuses allocated to your policy depends on the profits made by the company. These profits and bonuses cannot be guaranteed in advance but it is likely that bonuses will add significantly to your sum insured, bringing you a good investment return over the years of your policy. The with-profits endowment policy is a means of long-term saving with a minimum of risk and the potential for a good return. It smoothes out fluctuations in the value of investments, although there is no guarantee of the final (maturity) value of the policy.
Without profits policies do not share in profits made by the insurance company. The amount paid out on death or maturity will be the basic sum insured only.
What is whole life insurance?:
This pays the sum insured whenever your death occurs. Whole life insurance is not limited to a specific period like term insurance. Premiums are usually more expensive because it is certain that the insurance company will eventually pay the sum insured. With some policies you will have to pay the premiums until you die, but with others you may not have to pay premiums any more once you reach a chosen age – say 65 or 80 – but the insurer will pay the sum insured when you die. In these cases the policy is then known as “paid up”. Whole life insurance can be arranged with or without profits or can be unit-linked.
What is a reversionary bonus?:
This is a bonus that you do not receive as a cash sum but will be paid at the same time and in the same circumstances as the sum assured. The insurer will add a declared percentage to the sum assured payable under your policy. This addition is in proportion to the sum assured. This can apply to a with-profits policy or an endowment policy. If it is a simple bonus, the declared percentage applies only to the sum assured. If it is compound, it applies to the sum assured plus any previously declared bonuses. The bonus may usually be surrendered for its cash value. Usually, bonuses are declared net of tax.
What is a terminal bonus?:
This is an extra bonus payable on with profits or endowment policies that become payable upon claims which are made upon maturity or death of the policyholder. Normally the policy would have to be in force for a minimum number of years to qualify for such a bonus. This is also usually expressed as a rate per cent of the sum assured and any attaching bonuses at the date of the claim. The insurer may reduce or discontinue granting a terminal bonus according to its performance. Read the wording carefully.
What are unit-linked policies?:
With a “unit-linked” insurance policy there is no guaranteed sum insured payable except in the case of death. The investment element of the annual premium is invested by the insurance company in your choice of funds. Each fund has various degrees of risks and rewards, depending on its respective investment objectives. Some companies offer a choice of Managed Funds the insurance company manages these investments on your behalf. The value of your policy at maturity is based on the market value of the accumulated units in your selected funds when they are sold.
Insurance companies offer a range of different funds to which your policy can be linked. You should ask for an explanation of the different funds so that you understand the different risks and opportunities. There is no guarantee on the value of the sum to be paid at maturity.
The potential benefit from a unit-linked policy can be much greater than from a with profits endowment policy. But of course there is also a risk that the eventual benefit could be lower. Unit-linked policies are designed for long term investment and as such carry early surrender penalties, these penalties are usually confined to the first five years of the contract, but you should ask as these early surrender penalties vary from company to company.
The value of investments can fall as well as rise and past performance is not an indication to future performance.