Risk Management and Insurance Planning

Unit 3

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For term insurance, some of the key features are:

1) Low premium - We would be getting the highest protection value for every dollar of premium as compared to insurance with a cash value. This is because every single dollar premium will be devoted to the insurance portion. Hence term insurance could be a simple and straight forward approach to getting oneself protected in terms of dollars.

2) Pure insurance – As term insurance is a pure insurance, some will deem it as a necessary evil in terms of expense and not getting any money or return back. This may help simplify the decision making process of selecting insurance products. However, the lack of cash value sometimes act as a deterrent for some to consider insurance, as it becomes an added expense.

3) Sum assured constant – One other reason why premiums for term is relatively low is because the sum assured stays constant throughout the protection tenure. If we factor in inflation, the sum assured could face a “real” decrease in value, that is to say, the sum assured when paid out, may be able to purchase less goods and services as compared to some years ago.

4) Fixed protection tenure – Except for renewable term insurance, most term insurance requires a fixed term to be stipulated upfront, after which it stays fixed. Intuitively, the longer the tenure of the term insurance, for the same sum assured, the premiums will be higher.

For universal life, some of the key features include

1)  Having a large single premium upfront in exchange for a protection value of 5 to 10 times.

2) Because the of the size of the premiums that need to be committed at a go, financial institutions do offer a premium loan or premium financing. This option of leverage makes it attractive especially for higher income or higher net worth individuals.

3) There is also a cash value and sum assured that increase along the way. And because a large premium size is required,...