Analysis of Life Insurance - Research Paper Example

? Life Insurance I. Introduction: Life insurance is defined as a contract between the insurer and the owner of the policy where a reimbursement is agreed from the insurer to the policy owner in case of any accidental death or critical illness happens with the policy owner. The one who is insured has to pay a certain amount in the form of premiums as the cost of the insurance or the service on a monthly or yearly basis. Exclusions in relation to such services are generally explained and declared in the contracts. For example such insurances are not provided in cases of frauds, or cases of suicides, wars, riots and civil commotions (What is life insurance?, n.d.). The need for life insurance arises to obtain a form of financial protection against accidental incidents or deaths for which individuals are not always prepared. If insurance is ready, through payments of the premiums, then in cases of accidental deaths or incidents, individuals can be insured. Life insurances provide benefits for deaths or critical illnesses, for financial interests of individuals and family, for insurances at different stages of life, plans for retirements, loan facilities, as well as with benefits of tax payments (Why life insurance?, n.d.). The two main types of insurance are the whole life insurance and term life insurance where the whole life insurance offers for permanent insurance and term life insurance offers for insurance for certain terms or period of time (Magni, 2013). The present study discusses about life insurance with particular focus on the differences between whole life insurance and term life insurance and trying to determine which is better, also having an understanding of the relationship of the insurance with economic situation. II. Discussion: Term Life Insurance: Meaning: Term life insurance is defined as the policy of life insurance whose coverage period for the insurance has a set duration limit. On expiry of the policy the owner of the policy can decide on either renewing the policy or to end the coverage of the insurance plan. The benefits associated with such insurances are mainly limited up to the death of the policy owner. However in order to obtain the benefits of the plan, the death of the owner is necessary to occur within the time limit set by the term life insurance. If such time limit is passed and nothing happens to the individual, the owner does not receive any benefits from the insurance. Thus term life insurance do not provide with any savings from the investments that the policy owner makes for the insurance (Term Life Insurance, 2013). Universal Policy of Life Insurance: The universal policy of life insurance reflects that a flexible permanent life insurance is offered to the owner of the policy that requires the individual to make low cost protection payments to the insurer and also in turn obtains a savings from the insurance plan. Thus a cash value buildup is possible with the investment of this type of insurance. With the universal policy of life insurance, the owner of the policy is capable of using his interest that he gains from his savings in order to pay the premiums for the insurance. The universal policy of life insurance was initiated considering the need for more flexibility for the owners of the policy as the policy allows shifting of the invested money between the insurance and the savings from the plans. Premiums of these plans are variable and are divided into insurance and savings by the companies offering the insurances. Thus the owner of the policies is allowed to make adjustments between their payments depending upon the different circumstances that they belong to (Universal Life Insurance, 2013). Thus the most essential benefit of the universal policy of life insurance is its flexibility along with the permanent insurance it offers to the policy owners. It enables the policy owners to adjust depending upon their needs and conditions. Based on the policy, an interest is earned from the cash value of the insurance. This interest is based on the financial index stated in the contract and the growth is deferred in the form of tax. Thus the cash value can be accessed by the policy owners at any point of time. The universal policy of life insurance keeps in focus that at every stage of life of an individual, the needs of insurance will change. Thus the policies are so planned such that the long term needs of the individuals can me met (Life Insurance Protection that Stays With You, 2013). Whole Life Insurance vs. Term Life Insurance: The Debate: In the earlier times, the whole life insurance was more popular and the term life insurance had not played such significant roles like they play in today’s world. However, the debate over whole life insurance and term life insurance exists and it is believed that although the benefits of the whole life and term life insurances depend largely on the needs of the policy owners and the time period for which he needs the insurance, yet, the whole life insurance is considered to be the better form of insurance among the two. The benefits of whole life insurance are more as they are permanent in nature while the term life insurance offers benefits for certain periods of time. As a result of the whole life insurance, a tax sheltered cash account is built up for the policy owner, the amount that can be used by the individual for investment in the plan (Magni, 2013). As far as the term life insurance is covered, only the actual life insurance is covered. There are no other associated benefits. Moreover, with expiry of the insurance, the policy owner does not gain anything unless he renews the plan. And, in order to have the benefits, the policy owner has to pass within the time duration set for the insurance, otherwise which the insurance does not hold good for the policy owner. Term life insurances are temporary while whole life insurances are permanent. The payments of premiums are also different for the two insurances with the premiums of whole life insurance being expensive than the term life insurance. However, while the premium is set at a level and sticks to that level for the whole life insurance; in case of term life insurance, the premiums are initially less but gradually they increase on an annual basis (Magni, 2013). Thus with all the differences and the benefits that each of the insurances have for the policy owners, the debate is still existing on which is better. It can be understood that actually each of the insurances is beneficial at different stages and situations depending upon the need of the policy owners. Whole Life Insurance vs. Universal Policies: The Debate: During the 70s and 80s there has been significant debate on the benefits of whole life insurances versus universal policies of life insurance. People almost rejected the use and benefits of the whole life insurances. It was researched that such rejection came from the fact that people did not initially understand the meaning and true benefits of whole life insurances. Thus universal life insurance was about to replace the place of whole life insurance, both being forms of permanent insurances for policy owners. It was on the other hand found that there were several agents who did not realize the true meaning and benefits of the universal policies of life insurance. Researches had thus being conducted to realize the superiority of whole life insurances over the universal policies. Objective analysis and comparisons that could be obtained between the two forms of policies enabled the agencies to be convinced (Knaus, 2009, p.74). The universal life insurances had projected certain rates of return that reflected double digits and proved to be absurd against the whole life insurances (Knaus, 2009, p.74). However there are other studies that focus on universal life insurance being more beneficial than whole life insurance. Such views come from the fact that universal life insurance is extremely flexible in nature where the face amount and charges of premium can be altered at any point of time by increasing or reducing them, with flexibility being considered as a vital benefit associated with insurance plans (Yellen, 2013). Thus it can be said that there are two different views in regard to the comparison of whole life versus universal life insurances and hence the debate persists. III. Comparison: Types of Insurance: Life insurances are primarily of two main types. These are the term life insurance and permanent life insurance. Term insurance is considered as the most affordable form of life insurance particularly at its initial stage. It is generally applicable for individuals having temporary needs. It provides insurance protection to an individual for a certain period of time. The benefit is obtained by the policy owner only for that specific period of time. If the policy expires, then the owner does not receive any benefit or savings after that (What are the Different Types?, 2013). On the other hand, permanent insurance is an insurance that is applicable for a permanent life of an individual and offers benefits permanently. If the premiums are paid on time and on a continuous basis, and if no loans, withdrawals or surrenders are taken, then the policy owner is paid the full face amount of the insurance. As the plan is for a lifetime purpose, thus the cash value is accumulated by the insurance that can be invested by the policy owner over a significant amount of time (What are the Different Types?, 2013). Whole life and universal life insurances, as discussed earlier, are both permanent forms of life insurances. The premiums of the permanent life insurances are more expensive than the term life insurances. However while the premiums for the permanent life insurances remain the same over the years; the premiums for the term life insurances increase after a certain amount of time, on an annual basis (Applegarth, 2011). The Better Life Insurance: In order to decide which of the two types of life insurance is better for investment, it is necessary to say that although each has its benefits and disadvantages as well, and whole life and universal life insurances that are permanent life insurances tend to be more effective and beneficial for the policy owners, yet it actually depends largely on the needs of the policy owners and the time periods for which they require the insurance. Thus although there are debates over the uses and benefits of these insurances, each of them actually have their individual benefits for the policy owners. However, owing to the greater returns and facilities of savings that are offered by the permanent life insurances, the selling of these insurances seem to be more than the term life insurance (Maurer, 2013). On one hand the returns are higher with also permanent life insurance such as the universal life insurance being extremely flexible; on the other hand the premiums of these insurances are more expensive than the term life insurances. For the term life insurances if the premiums are less that can be considered as an advantage for the policy owners; on the other hand the returns are only for the period of time for which the insurance plan is held. On expiry one has to renew the policy again. Moreover there are no savings from term life insurances (Maurer, 2013). The privileges of tax and cash value that can be used by the individuals for investment in the premiums are made available through permanent life insurances and are lacking in case of term life insurances (Maurer, 2013). Thus depending on the policy owner, the decision would matter as to which is better. For an individual who is in need for greater benefits for a long term and if he is capable of making the payments of high premiums, then permanent life insurance would prove to be best choice. Likewise the term life insurance would be preferable to others. Examples: The term life insurance is the cheapest form of insurance. For example, one can take a life insurance for insurance against death for a limited period of time which may be for five, ten or twenty years of time. Thus if the person dies within this period of time, he gets the insurance. Else, there would be no benefit unless he renews it after expiry of the policy (Gupta 2010). When a universal life insurance is taken, it contains both insurance and savings elements for the owner. A fixed premium is paid from which the benefit of the insurance is built up and the rest gets invested in the savings account. The amount of saving account acts as a resource for deferring taxes that can be used by the individual for investment in premiums or for taking a loan (Universal Life Insurance, 2013). IV. Clarification: Relationship between the Economic Situation and Life Insurance: In the recent times, life insurance has become an essential part of the financial sector of the world economy as a whole. With financial services being offered to customers at large, the capital market has greatly benefited from its investment. A significant percentage of the Gross Domestic Product (GDP) across the world in different countries constitutes the benefits from the life insurance products and services. This has primarily been the case with developed countries while developing countries are still found to be struggling to improve their financial sector. Individuals and the economic sector are provided with several essential financial services through life insurance (Beck and Webb, 2003, pp.51-88). This includes long term savings mechanisms as reinvestment of the savings in other projects. Long term finance has been significantly provided by the life insurance plans. As the life insurance holds greater importance in the economy of the world as a whole, it has become necessary to determine the demographic, financial and institutional factors that can give rise to a life insurance market that is vibrant and beneficial for the economy. Thus, there are demographic, financial and institutional determinants that determine the level of consumption of life insurances in different countries across the world (Beck and Webb, 2003, pp.51-88). Of all factors price of the insurance is the most essential determinant that reflects upon the level of consumption of life insurance across different countries in the world. With difference in the economic conditions in different countries, at different times, the consumption of life insurances also changes. This can be attributed to the fact that individuals tend to lower their costs of expenditure during lower economic conditions prevailing in a country, or when the country is encountered with economic recession, and in such times, they also would not prefer to spend extra on insurance premiums. Depending upon the price set by the life insurance companies, the supply and demand of the insurance products would vary. Particularly during slower economic condition of a country, high prices of insurance products would lead to lower sells and so on (Beck and Webb, 2003, pp.51-88). Life Insurance to Follow Economic Situation: Taking into consideration the effects on economic condition of a country on the economic and financial activities of the country, it is essential that life insurance companies decide on their products and services and their prices depending on the economic situation. Particularly when there are economic slowdowns in some countries or the world as a whole, the cost of expenditure of individuals tend to slow down. In such cases, if the insurance products are too expensive for them, they would prefer not to purchase them or it could also be the case that the sales of permanent life insurances are more affected as they are more expensive than the term life insurances (Beck and Webb, 2003, pp.51-88). Thus it can be said that while deciding on the insurance products, both in case of term life and permanent – whole and universal life insurances, the insurance companies should take into consideration the economic situation of the country that is highly associated with the services offered by life insurance companies. Factors such as urbanization, economic stability, institutional development, and development of the banking sector need to be considered while planning for the insurance schemes and prices of the products (Beck and Webb, 2003, pp.51-88). V. Conclusion: It could be obtained from the above study that insurance are of two major types- permanent and term life. These two types of insurances have both of their advantages and disadvantages, particularly in terms of their pricing and the time period for which they offer for their services. While the term life insurance is considered as the cheapest form of insurance, the whole life and universal life insurances are more expensive in terms of the premium that are required to be paid. However, the services offered by the permanent life insurances are more effective and beneficial for the policy owners which are again not the case with the term life insurances. Thus both are advantageous and disadvantageous in their own respects. It cannot be concluded in general as to which is better than the other. This is primarily because each individual has their own needs based on which one type of insurance might be preferred more than the other. Thus, for an individual who cannot afford to pay high premium, would prefer to go for term life insurance. However, if one can afford to pay and is willing to have long term benefits from the insurance plan, and also to make use of the savings for further investment of premiums or other loans, then it can be recommended that the permanent life insurance – whole and universal – is better than the term life insurance. Again, whether an individual considers the whole life or the universal life insurance depends on the individual needs. References Applegarth, G. (2011). Term or permanent life insurance? MSN. [Online]. Retrieved on 9 November 2013 from: http://money.msn.com/life-insurance/term-or-permanent-life-insurance.aspx Beck, T. and I. Webb (2003). Economic, Demographic, and Institutional Determinants of Life Insurance Consumption across Countries. The World Bank Economic Review. 17(1), 51-88. Gupta, A. (2010). A term life insurance policy is the cheapest form of life cover. Economictimes. [Online]. Retrieved on 10 November from: http://articles.economictimes.indiatimes.com/2010-05-09/news/28472187_1_life-insurance-death-benefit-premium Knaus, J.M. (2009). Why Are You Laughing? Indiana: AuthorHouse. Life Insurance Protection that Stays With You (2013). Nationwide. [Online]. Retrieved on 9 November 2013 from: http://www.nationwide.com/universal-life-insurance.jsp Magni, B.R. (2013). Whole life vs. term: There’s a clear winner here. Lifehealthpro. [Online]. Retrieved on 8 November 2013 from: http://www.lifehealthpro.com/2013/06/19/whole-life-vs-term-theres-a-clear-winner-here Maurer, T. (2013). Term vs. Perm (Life Insurance) In 90 Seconds. Forbes. [Online]. Retrieved on 10 November 2013 from: http://www.forbes.com/sites/timmaurer/2013/05/03/term-vs-perm-life-insurance-in-90-seconds/ Term Life Insurance (2013). Investopedia. [Online]. Retrieved on 8 November 2013 from: http://www.investopedia.com/terms/t/termlife.asp Universal Life Insurance (2013) Investinganswers. [Online]. Retrieved on 10 November 2013 from: http://www.investinganswers.com/financial-dictionary/insurance/universal-life-insurance-1542 Universal Life Insurance (2013) Investopedia. [Online]. Retrieved on 8 November 2013 from: http://www.investopedia.com/terms/u/universallife.asp What are the Different Types?, (2013). Lifehappens. [Online]. Retrieved on 9 November 2013 from: http://www.lifehappens.org/what-are-the-different-types-of-life-insurance/ What is life insurance? (n.d). Policybazaar. [Online]. Retrieved on 8 November 2013 from: http://www.policybazaar.com/knowledge-base/Life-insurance/what-life-insurance.html Why life insurance? (n.d.). Policybazaar. [Online]. Retrieved on 8 November 2013 from: http://www.policybazaar.com/knowledge-base/Life-insurance/why-life-insurance.html Yellen, H. (2013). Whole Life vs. Universal Life Insurance – A Fair and Balanced Comparison. Bankonyourself. [Online]. Retrieved on 9 November 2013 from: http://www.bankonyourself.com/whole-life-vs-universal-life-insurance Read More