Life insurance offers valuable financial protection in the event of your early death to family members dependent on your earnings. 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 policy holder 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.
The most common form of insurance 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:
- secretly by the policy holder – in which case the beneficiary will be unaware of this appointment, or alternatively;
- 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 policy holder, 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.
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.
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.
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;
- Level Term – You are insured for the same amount throughout the agreed term.
- 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).
- 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.
- 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.
- 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.
- 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%.
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.
- 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.
- 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 smoothens 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.
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.
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.
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.
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.
Before you purchase a unit linked policy, the insurance intermediary is required to assess whether such product is appropriate for you that is whether you have the necessary knowledge and experience to purchase such a product. This is done through the carrying out of an Appropriateness test. In carrying out this test, the intermediary will ask you some questions regarding your knowledge and experience can include the types of services and products you are familiar with; the nature, volume and frequency of your previous transactions; and your level of education, profession or former profession.
If the intermediary concludes that you have the necessary knowledge and experience to understand the risks involved in this product, then you may purchase the product.
If the intermediary concludes that you do not have the necessary knowledge and experience, or you have not supplied enough information to enable it to reach a conclusion, then you will receive a warning from the intermediary saying that either it does not regard the proposed product as appropriate or that the information you have provided is not enough to enable it to determine whether the product is appropriate for you or not. If you insist on going ahead with the purchase of the product, you must accept the risk entailed and you will be provided with a relevant risk warning.
The intermediary may be exempted from carrying out the appropriateness test and proceed directly to the sale of the product to you on condition that::
- the product involved does not have to be a ‘complex’ product;
- You have chosen to contact the intermediary to purchase the product yourself, (i.e. at your own initiative). This means that you are not responding to a personalised approach to you from the intermediary which was intended to influence you in respect of a specific product.
- You will be warned that the intermediary is not exercising any judgement on your behalf.In such cases, you do not have to answer any questions about your investment knowledge and experience, financial situation or investment objectives. The firm may of course ask you questions for other purposes, particularly if you are a new customer.
You may request that you are provided with advice as to whether such policies are suitable for you in your circumstances. At this stage, the insurance intermediary or the insurance company distributing the product, will be required to make a personal recommendation to you in this regard and would therefore need to carry out a suitability test to ensure that this product is suitable for you. In carrying out a suitability test, the intermediary, asks you questions on your financial situation; investment objective and knowledge and experience to ensure that the product in question is suitable for you, in accordance with your risk tolerance and ability to bear loss.
When providing investment advice, the intermediary shall provide you with a suitability statement in a durable medium specifying the advice given and how the product in question is suitable for you.
As part of the Suitability test, you are likely to be asked questions about the following:
- Your investment objectives
- This can include questions about the length of time you wish to hold your investment, your risk appetite and profile, whether you wish to invest in order to earn income or capital growth,
- Your financial situation
- Information regarding your financial situation may be obtained through questions about matters such as the source and extent of your regular income, your assets (both liquid assets for example cash as well as illiquid ones like property), any debts you have and other financial commitments.
- Your knowledge and experience
- Questions regarding your knowledge and experience can include the types of services and products you are familiar with; the nature, volume and frequency of your previous transactions; and your level of education, profession or former profession.
If the intermediary does not, or cannot, obtain the necessary information to assess suitability, then it cannot make a personal recommendation. If you provide only limited information, this will affect the nature of the service the intermediary will be allowed to provide to you.
Some life policies have optional extras:
- Waiver of premium
If you suffer from a temporary total disablement because of illness or injury, the insurance company will pay your premiums to maintain the benefits under the policy. There are usually time limits stated in the policy for the duration of the disablement.
- Critical Illness
This provides cover against the risk of you having a serious illness such as a heart attack or cancer. If you develop one of the illnesses listed in the policy a lump sum will be paid. Some insurers offer a regular income for a set period as an alternative to a lump sum payment. This type of insurance can be bought on its own or as an addition to whole life, endowment or term insurance. The following could be the illnesses accepted under the policy: heart attack, coronary artery bypass grafting, stroke, life threatening cancer, kidney failure, major organ transplant, paralysis, blindness, severe burns or a coma.
- Accidental Death Benefit
This benefit provides additional cover so that if you were to die as a direct result of an accident the insurance company will pay this benefit in addition to the main benefit. The amount of cover under this accidental death benefit can be up to the same amount payable under the main benefit thus doubling the amount payable in the event of death.
- Permanent Total Disability
This option guarantees the payment of a selected sum assured in case of permanent total disability after a waiting period of twelve months. If you are diagnosed as being partially disabled, the benefit is a percentage of the sum assured depending on the severity of the disability whilst you will remain covered for the rest of the sum assured. The rest of the life cover will remain as the sum assured on death.
These “extras” are sometimes called “Rider” policies because they run alongside the main cover which could be a whole life or endowment.
You should always check with your insurance representative about these “extras” and whether they are suitable for you.
It takes careful planning to choose the right life insurance policy for yourself, your family or business. It is also important to review regularly your life insurance needs to make sure that they keep up with changing personal and economic circumstances.
When you have decided on a policy you will have to complete and sign a proposal form. This form asks about such matters as your age, occupation and health. You must answer all questions truthfully. If you fail to do so, it can, in some circumstances, mean that your policy will not pay out.
A life insurance policy is a long-term commitment. It is not designed for you to cash in early. Insurance companies and financial intermediaries can help you decide what products are suitable for you. Never surrender a life insurance policy without taking expert advice.
Every effort is made to ensure your application for life insurance or a retirement plan is made in the full knowledge of all its terms and conditions, but most life policies have a “cooling off” period of not more than 30 days.
Go through the documents you receive following your application to purchase life insurance or a retirement plan. You should be given a form called “Statutory Notice”. This form clearly explains your rights to reconsider your decision to buy long term cover (such as life insurance or a retirement plan). The 30 day cooling-off period starts when you receive this form.
During this time, you have a right to inform the insurer that you don’t want the policy. You are not required to given a reason for your decision.
You are also entitled to receive a full refund of any initial premiums you have already paid. In respect of unit-linked policies (such as retirement plans) you might not receive the full amount if, in the meantime, the value of the units decreased.
The “Statutory Notice” has to be in Maltese and English and easily legible. Go through the questions in the form carefully. If you doubt your decision, act immediately without allowing the 30 days to expire.
With your paperwork, you should also have a “Notice of Cancellation”. You need to fill in this form and hand it over to the person who sold you the policy. As soon as the Notice of Cancellation is served, your policy is cancelled. Keep a copy of the form before you hand it in and make sure that you are given a receipt (or acknowledgment) there and then. The date when you hand in the Notice of Cancellation should be clearly stated.
If the insurer gives you any reward or benefit in the meantime, you are required to pay it back.
The Statutory Notice is not required in certain instances, such as when:
- you are purchasing term insurance in order to obtain credit or loan facilities and such requirement is shown by documentary evidence referred to or attached with the proposal for credit
- you are not the life assured or the spouse or child of the life assured,
- you are not purchasing life insurance as an individual; for example in the case of a group life policy.
What should I expect when purchasing a life insurance product (or any other long term insurance policy)?
- Obtain information about the insurance company issuing the policy. Get the name, address of its head office, whether it is established locally or abroad, and if it is a foreign company, the entity which represents it in Malta.
- Make sure you know the difference between the types of term, endowment, whole life or unit-linked policies. Know which type is suitable for you and why. Ask your insurer or insurance intermediary for a clear explanation of how it works.
- Obtain whatever explanation of the benefits and options of the policy. Keep copies of any written information regarding the product you are purchasing.
- Understand the duration of the policy (i.e. when the policy matures) and how you can terminate it prior to maturity. Note that you may incur extra charges if you decide to terminate your policy before its maturity.
- Know how much premium you need to pay, and when you need to pay it. Ask clearly what charges, if any, are imposed on the policy and take note of them. Ask how much is allocated to your policy (sometimes referred to as the “Investment Premium”). When such amount is expressed as a percentage (such as 95%), it indicates that 95% is actually allocated to your policy (5% is the fee taken by the insurance company). If you pay by standing order, make sure that your bank and the insurance company get exact details of your policy.
- Understand how bonuses are calculated and distributed. Obtain an explanation of different types of bonuses: reversionary or terminal, and the difference between such bonuses. Understand the manner in which they are calculated. Ask if any are guaranteed or not, even if the word guaranteed is written on the information.
- Clarify and understand your policy’s surrender values – that is, the amount of money which you may get over specific periods of time if you surrender your policy. Make sure you establish whether the surrender values are guaranteed or not. If they are only meant to give you an indication of what you might get you are NOT guaranteed that you will receive the amounts shown.
- If the policy allows for supplementary benefits, you have to pay additional premium. Check with your insurer or insurance intermediary the amount and purpose of each additional charge which will be added to your premium.
- Make sure you are given the following two documents, where applicable: (in either Maltese or English)
- Statutory Notice – this document which explains your right to withdraw your decision to purchase a long term policy within 30 days from the date on which you sign this notice.
- Cancellation Notice: You have to sign this within 30 days from signing the Statutory Notice in order to get your money back. If the insurance company gave you some gift with the policy, you also have to return it (unless otherwise stated in the policy).
- If you are given information about past performance, remember that what happened in the past may not necessarily happen in the future. Returns on investments can fall substantially. Ask your insurer or insurance intermediary to give you a pessimistic scenario and not only optimistic. Make sure the returns quoted are realistic in the existing market conditions when you are purchasing the policy.
AFTER YOU BUY
- The Insurance Company may declare bonuses – which once declared cannot be withdrawn. A company may choose not to declare profits on any particular year – if it deems appropriate to do so.
- When an insurance company declares a profit, you should receive a statement with the amount of profit declared. You should also be given the total value of benefits (plus bonuses) which have accrued to your policy. Remember your policy will only participate in profits if it is a “with profits” policy.
- This statement also includes information which explains the contents on such document. If in doubt, check it out!
One of the conditions on your life policy is the Days of Grace condition. This condition allows 30 days’ grace for payment of your renewal premium. If death should occur during these days of grace the claim would still be met and the insurer would deduct the outstanding premium from the sum payable. If the premium is paid on a monthly basis, the days of grace may be reduced to 15 days or none at all. Ask your insurer or insurance intermediary.
If you see no alternative but to surrender your life policy, you should first discuss the problem with your insurer or insurance intermediary.
Always get a written quotation of the surrender value from the insurance company before you make a final decision.
Think twice if someone suggests you surrender a policy with one insurance company and take one out with another company. This is called “churning”” and usually involves you in some financial loss on your existing policy (which would either have to be surrendered or made paid up).
If you surrender, your insurance company has to cover all the initial costs of issuing your policy. These costs include payment of commission, office administration costs policy documentation costs and other expenses connected with issuing your policy. These costs have to be met whether you continue your policy for the full period or discontinue it after only a short time because the insurance company would have incurred these expenses anyway. Remember the administration costs of the insurer under a long term cover are highest at the beginning and therefore the earlier the surrender, the greater the deduction for costs in proportion to the premiums already paid.
So if you surrender your policy, the insurance company has to keep enough money from the premiums you have paid so far to cover all these costs. In addition, allowance also has to be made for the cost of providing you with life cover for your full sum insured. This must not be overlooked as the full sum would have been payable in the event of your early death before deciding to surrender.
A surrender in the early years of the policy means you will get back a little or a lot less than the premiums you have paid. Very often, nothing at all is payable if you surrender the policy within the first year or so.
Ask about surrender terms when purchasing your policy. Any values you may be given are only indicative and are likely to change during the term of your policy.
- Some contracts – term or temporary assurances such as family income benefit policies – do not as a rule ever attain surrender values. This is because these are life policies without a savings element – they provide protection only. They can be compared to household or motor insurance policies which pay out only if a claim arises.
- If your policy is intended to repay a loan – for example a home loan – you should not surrender it unless you have made other arrangements to repay the loan.
- When taking out or changing a home loan, it is usually in your interest to use your existing policies as backing for the new loan. A top-up policy may be required if the new home loan is more than your previous one.
- The cash value of policies linked to investments (such as collective investment schemes) is dependent on the value of your holding in the fund at the time of surrender.