Insurance versus assurance.
20 . 08 . 18
By Ignatius Wilson
An interesting chapter in the history of insurance and risk reduction, like using life insurance to protect your loved ones financially in case of your death or income protection insurance to maintain your income in case you cannot work, is the investment-style insurance products of annuities and insurance bonds.
These two products are commonly called assurance policies because the policy holder is assured of the agreed sum being vested to them. This provides immediate contrast to the common life insurance policy of today, so-called term life.
Term life is the ubiquitous insurance that many people own without realising through their superannuation fund. Its purpose is to pay an agreed lump sum if the insured dies. The amount can be altered without restarting a new policy but it will lapse, not vest, if its ongoing fee called a premium is not paid up to date.
Endowment and whole-of-life are two styles of assurance policies. Endowment pays the assured value upon the policy holder reaching a certain age, bearing some similarities to superannuation being vested on preservation age. This contrasts to whole-of-life which pays on the death of the policy holder, whatever age.
The way the assured value is built up within the endowment or whole-of-life policy also varies. An annuity is an income stream the policy holder receives by paying a lump sum at the beginning of the contract. When they die or reach preservation age they receive the remainder plus any investment gains according to the product terms.
A second product, the insurance bond, can be considered as a traditional bond purchased in pieces, again, throughout the life of the insured until an agreed age. Similarly, on the vesting age or death the client receives the assured value of their premiums and any capital gains on the ‘bond.’
One way to look at these products is if annuities are the reverse of insurance bonds. Both require money to be transferred to the financial services provide, the insurer. However, annuities pay back throughout their life after a large original investment, perhaps leaving little assured value left over; while insurance bonds cost money, increasing the sum of the assured value throughout its lifecycle.
One reason term life is has replaced whole-of-life policies these days is that its premiums are up to 90% cheaper than assurance policy premiums. In any case, insurers do not even offer assurance products to new clients currently. This may be through lack of consumer interest. It may also be because term life is more profitable for insurers.
As I mentioned, term life policies are not assured. They lapse if the premium is not paid. For example, if a policy is hold through a superannuation fund and you have been paying the premium your whole working life, if you change super fund or your contributions stop, you will lose the cover. Assurance policies are more consumer-focused, while non-assurance polices are provider-focused.
It is worthwhile considering how this aspect of the financial world works and why particular products are more popular than others. Perhaps we will see a resurgence in assurance policies in the future.