According to the dictionary Insurance mean a legal contract in which an insurer promises to pay a specified amount to another party, the insured, if a particular event (known as the peril), happens and the insured suffers a financial loss as a result. The insured’s part of the contract is to promise to pay an amount of money, known as the premium, either once or at regular intervals. In order for an Insurance contract to be valid, the insured must have an insurable interest. It is usual to use the word ‘insurance’ to cover events (such as a fire) that may or may not happen, whereas assurance refers to an event (such as death) that must occur at sometime (life insurance). The main branches of insurance are accident insurance, fire insurance, holiday and travel insurance, household insurance, liability insurance, marine insurance, Motor Insurance, private health insurance, property insurance etc.
Life Assurance – An Insurance Policy that pays a specified amount of money on the death of the life assured or in case of an endowment policy, on the death of the life assured or at the end of an agreed period, whichever is earlier. Life assurance grew from a humble means of providing funeral expenses to a means of saving for oneself or one’s dependants, with certain tax advantages. With-profits policy provides sums of money in excess of the sum assured by the addition of bonus. Unit-linked policy invests the premiums in funds of assets, by means of buying units in the funds.
Endowment Assurance – An insurance policy that pays a specified sum of money on an agreed date or on the death of the life assured, whichever is the earlier. As these policies guarantee to make a payment (either to the policyholder or to his/her dependants) they offer both life cover and a reasonable investment. A with-profits policy will also provide bonuses in addition to the sum assured. These policies are often used in the repayment of a personal mortgage or as form of saving.
Unit-linked policy – A life assurance policy which depend on the performance of a portfolio of shares. Each premium paid by the insured person is split: one part is used to provide life assurance cover, while the balance (after the deduction of costs, expenses, etc.) is used to buy units in a unit trust. In this way small investor can benefit from investment in a managed fund without making a large financial commitment. As they are linked to the value of shares, unit-linked policies can go up or down in value. Policyholders can surrender the policy at any time and the surrender value is the selling price of the units purchased by the date of cancellation (less expenses). Until the 1970s the profits on with-profits policies were determined by the size of the bonus given at the discretion of the life assurance company; this depended on their investment success and their profits in any particular year. Unit-linked policies, involving unitizes portfolios, have produced higher benefits for policyholders than those that rely on with-profits bonuses. There has therefore been widespread increase in unit-linked savings plans or ULIPs with both with and without life assurance cover.
Whole life policy – A life-assurance policy that pays a specified amount on the death of the life assured. Benefits are not made for any other reason and the cover continues until the death of the life assured, provided the premiums continue to be paid, either for life or until a specified date. They may be with-profits policy or unit-linked policy.
With-profits policy – A life-assurance policy that has additional amounts added to the sum assured, or paid separately as cash bonuses, as a result of a surplus or profit made on the investment of the funds of the life-assurance office.
INSURED – A person or company covered by an insurance policy. In some policies that cover death, the alternative word assured may be used for the person who receives the payment in the event of the assured’s death.
INSURER – A person, company, syndicated, or other organization that underwrites an insurance risk.
PREMIUM – The consideration/amount payable for the contract of insurance.
SINGLE PREMIUM – A Life Insurance Policy in which the policyholder pays only one capital sum rather than regular premiums.
REGULAR PREMIUM – A life insurance policy in which the policyholder pays premiums at regular intervals of time (yearly, quarterly) as agreed upon by the Insurance Company.
INSURABLE INTEREST – A person is said to have an insurable interest if the event insured against could cause that person a financial loss. For example, anyone may insure their own property as they would incur a loss if an item was lost, destroyed or damaged. If no financial loss would occur, no insurance can be arranged. The limit of an insurable interest is the value of the item concerned, although there is no limit on the amount of life assurance a person can take out on his or her own life, or that of a spouse, because the financial effects of death cannot be accurately measured.
BONUS – An extra amount of money additional to the proceeds, which is distributed to a policyholder by an insurer who has made profit on the investment of a life-assurance fund. Only holders of with-profits policy are entitled to a share in these profits and the payment of this bonus is conditional on the life insurer having surplus funds after claims, costs, and expenses have been paid in particular year.
No-claim bonus – A reward, in the form of a premium discount, given to policyholders if they complete a year or more without making a claim. The system is mostly used in motor insurance. In every case, the bonus is allowed for remaining claim-free and is not dependent on blame for a particular accident.
Reversionary bonus – A sum added to the amount payable on death or maturity of with-profits policy. The bonus is added if the life-assurance company has a surplus or has a profit on the investment of its life funds. Once a reversionary bonus has been made it cannot be withdrawn if the policy runs to maturity or to the death of the insured. However, if the policy is cashed, the bonus is usually reduced by an amount that depends on the length of time the policy has to run.
Terminal bonus – An additional amount of money added to payments made on the maturity of an insurance policy or on the death of an insured person, because the investments of the insurer have produced a profit or surplus. Bonuses of this kind are paid at the discretion of the life office and usually take the form of a percentage of the sum assured.
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