|What you should know about Insurance
- appeared in Sunday Times on 12th November 2006
The Insurance Board of Sri Lanka, the independent body set up by the Government to regulate the insurance sector, will be initiating a series of articles to provide information to the consumers to promote consumer understanding of the insurance system. This article gives information on the Insurance Industry in Sri Lanka, understanding life assurance, its importance, types of life assurance products offered to consumers and important facts in choosing a life assurance policy. The responsibilities mandated upon each participant of the insurance sector and matters relating to General Insurance Business will be dealt later in this series of articles.
Insurance Industry in Sri Lanka:
Sixteen (16) Insurance Companies (Insurers) registered with the Insurance Board of Sri Lanka (IBSL), are presently underwriting insurance business. Twelve of them are composite companies, three of them engage in General Insurance business and one company engages only in Long Term Insurance business. When a Company is registered to transact in both Long Term Insurance and General Insurance business, those companies are recognized as composite companies.
Fifty-Four (54) companies are registered with the IBSL as insurance brokers and they engage in insurance broking business.
Apart from traditional insurance policies, Insurance companies design various types of insurance products for the public. Insurance Companies and Insurance Broking Companies engage agents and in-house sales teams to sell these insurance products to the public. The Insurance Broking companies function as intermediaries for placing insurance business with the insurance companies.
The Insurance Companies and Brokers appoint agents and they are required to maintain a register of agents on a continuous basis. The agents are not salaried employees. They are paid a commission for the business they bring to their companies. Insurance agent could work only for one insurance company or one broking company. The Board has mandated passing a pre-recruitment test for the agents. Passing this test is one of the pre-requisite for any person to function as an agent. The Sri Lanka Insurance Institute (SLII) has been authorized to conduct the pre-recruitment test on behalf of the Insurance Board. The Insurance Institute issues an identity card to every person who qualifies to practice as an insurance agent on passing of the pre-recruitment test. Any one interested in obtaining a Life Insurance Policy through an agent should first ensure that the person selling the policy carries an Identification Card authenticated by the SLII/Insurance Company or the Broking Company. Under the present law only individuals can function as agents.
Regulation of the Insurance Industry in Sri Lanka:
The Insurance Board of Sri Lanka was established with effect from 1st March 2001 as provided by the Regulation of Insurance Industry Act, No. 43 of 2000 for the purpose of development, supervision and regulation of the Insurance Industry of Sri Lanka. The object and responsibility of the Board is to ensure that insurance business in Sri Lanka is transacted with integrity and in a professional and prudent manner with a view to safeguarding the interests of the policyholders and potential policyholders.
What is Life Assurance?
Life Assurance is “a contract in which the insurance company agrees to pay a given sum on the happening of a particular event, contingent upon the duration of human life or pay the sum assured on maturity”.
Though human life cannot be valued, a monetary sum could be determined based on the following:
- Duration of the policy and/or Age
- Individual Risks of the Life to be insured
- Loss of income in the future years
- A person’s ability to pay premium
- The purpose for which a policy is sought
Life Assurance has two components, i.e. a savings component and a risk component. Some may select to protect risks only while some may cover risk with a savings element. Life Assurance products provide a definite amount of money to the life assured or his/her dependants in case of death of the policyholder during the period or becomes disabled on account of an accident or sickness causing reduction/complete loss in his/her income earnings whilst the policy is in force. An individual can also provide for his/her old age when he/she ceases to earn and has no other means of income through purchasing an annuity.
What are basic types of Life Assurance Products?
The basic Life Assurance products, which offer protection with savings, are as follows:
- Pure Endowment product is one in which benefits are payable on a specified date if the life assured survives at that time. If the person whose life is assured died before that date, no benefits are payable under the policy.
- Term Assurance products provide fixed amount of money on death during the period of contract. This policy provides protection for a selected period or term. The sum assured is payable only if insured person dies during the period or term of contract, i.e. no payment will be made if the insured person survives the period of contract. Premiums are paid throughout the selected period.
- Decreasing Term Assurance policy is similar to the Term Assurance policy, except the fact that benefit decreases annually until it is extinguished at the end of selected period. This policy is suited for a temporary need, which is reducing, such as housing loans repayable in instalments. Premium may be paid in one lump sum or over the selected period.
- Convertible Term Assurance policy is a Term Assurance policy with the option to convert to another policy (such as an endowment or whole life) without the evidence of health. The right to convert (change) is subject to certain restrictions, such as;
- Right to convert must be exercised within a specified period
- Conversion may not be permitted beyond a certain age (55 or 60)
- Premium will change after conversion
This policy is ideally suited for those who are about to begin a career
- Endowment Assurance products provide a fixed amount of money either on death during the period of contract or at the expiry of contract if life assured survives. Should the insured survive the term, the policy is said to mature. Thus the insured amount becomes payable either at death or at maturity. Premium is payable throughout the period of contract. There are two types of endowment assurance policies;
- Participating Policies where the policyholder is allowed to share the profits of the insurance company, which is usually paid as dividends or bonus.
- Non-participating Policies where the Policyholder is not entitled for the profits of the insurance company.
- Whole life Assurance products provide a fixed amount of money on death whenever it occurs. Premium may be payable till death or may be limited to a selected period (say up to age of 60).
- Annuity/Pension policies provide series of monthly payment on stipulated dates that the life assured is alive on the stipulated dates.
Insurers modify these basic types of life assurance products and add “labels” for sales purposes.
Why is it important to have one’s life insured?
Human life is subject to risks of death and disability due to natural and accidental causes. Loss of a life could result in loss of income to the dependents resulting in hardships to the family, sometimes making survival of dependents dreadful. Risks are unpredictable. Death/Disability may occur when a person least expects it. An individual can mitigate the effects of such unexpected risks through life assurance.
Life Assurance is useful in a number of situations, which includes:
What you need to remember when selecting an insurance product:
- Protection: The purpose of Life Insurance remains an important element in the event of early death:
- To ensure immediate family members (dependents) are able to finance their basic needs and are able to maintain their standard of living,
- To ensure dependents has cash and income to settle all bills, taxes, loans and fulfil other obligations,
- To ensure the children have money for their education, and
- To ensure that there is extra income when the earnings are reduced due to a serious illness or accident.
- Savings: Providing for one’s family and oneself, as a long-term exercise (If a policy with a savings component is obtained for a desired purpose such as lump sum at retirement, marriage, settlement of loans etc).
- Investment: The accumulation of wealth and safeguarding it from the ravages of inflation.
- Retirement: Provision for old age becomes increasingly necessary, especially in a changing cultural and social environment.
There could be countless options to choose from, policy types, and policy conditions. Anyone who desires to buy a life assurance policy needs to be diligent when choosing a policy to suit the needs. It is worth taking time to discuss with the insurance company or its intermediary (the insurance agent or the insurance broking company) about the policy that fulfils one’s requirements. Deciding the adequacy of the amount to be insured needs a careful consideration. Prior to deciding the sum to be assured, it is advised to analyse and compare the financial needs of the dependents and their potential earnings, one’s capacity to save and invest and potential returns of the policy, if any. The value of the insurance policy that one decides to buy should fulfil the gap.
Affordability is an important consideration and before a policy is effected, it is advised to examine carefully, bearing in mind possible future financial commitments, such as those which may arise following a change in civil status, parenthood, etc. Statistics prove that this aspect is not receiving adequate attention that is evident from the large number of policies lapsing, even after one year or several years, due to non-payment of premiums as the needs and the circumstances have changed since purchasing the policy.
It is advisable to avoid going for unwanted additional coverage, which comes in “packages”. Instead, a suitable additional coverage of one’s choice can be obtained at an additional premium, which gives better value for money. It is always advisable to buy only what really requires for the intended purpose and/or future requirements. It is a pre-requisite for person who decides on a certain life policy to make sure that the life policy recommended is right for the purpose.
The other important factor is to make sure that the terms and conditions of the policy are understood properly. Insurance Policy is an evidence of a legal contract between the policyholder and the Insurance Company. As in other contracts, it is better to make sure that all provisions in the policy are understood and any doubts clarified with the agent/broking company or the insurance company. Generally the insurance companies give a specific time period (majority of companies give 14 days) from the effective date of the policy within which a policyholder could reject the policy if he/she is not satisfied. In such situation a company will refund the premium paid, subject to deduction of initial expenses, if any.
- To be continued
Next article will explain other aspects of Life Assurance such as the rights to insure, disclosure of facts, assignment & beneficiary designation of life policies, rights of policyholders in cancellation and lapsing of life policies, claims and settlement of life policies.