Thursday 28 February 2013

Life Insurance – Know about the Risk Involved

The general perception of life insurance is that it is a risk-free model for the policyholders. This conception arises out of the fact that through the insurance of your life, you transfer the financial risk to the insurer in the event of your demise before the completion of the term. However, in some cases, the risk may give a blow to you instead of the insurer. That probability makes it important that you learn the risks that are common to all life insurance policies.

Life Insurance – Know about the Risk Involved

Experience of Mortality

In universal life insurance, there is a clear distinction between the mortality function and the investment function of a specific plan. It implies that you are not charged for the guaranteed cost of the particular policy; instead, a forward-looking approach to price is adopted by the insurance company. This working method is based on the presumption that the guaranteed cost will be more than the real cost. If the company is a genuine one and reputed for its fair dealing, you have to pay only for the calculated cost. But if the company is used to shoddy business practices, you will end up paying a higher cost for insurance. You may think about terminating the life insurance plan if you find it hard to afford a high premium for a longer time span.

Experience of Investment

In the case of fixed policies, universal life insurance comes with an assumed interest rate. This rate refers to the lowest interest charge that must accrue to the cash-value account of the policyholders. The assumed interest rate covers the expected profit and cost incurred by the insurer. This rate is of dynamic nature and varies with respect to market conditions. The life insurance company expects a positive investment experience. If that happens in reality, the assumed interest rate will be credited to your policy. But in the event of incorrect assumptions, you will get less than the assumed interest rate. A complication arises if the insurer feels that the actual mortality charge will be lower than the estimated margin. You will not gain much if interest accumulating on your policy is insufficient to cover the insurance cost. As a result, you may end up paying for an additional premiums to keep hold of the policy or may seek to lower death benefits that come with the insurance plan.

Payment for Premium

Every policy owner is obliged to meet on-time premium payments for a long period of time to retain a life insurance policy. Excluding the case of one-year and five-year policies, the premium period extends over 10 years. In the case of a permanent plan, the premium is to be paid for more than 50 years. If a premium is not paid in time, the policy may lapse and there will be a great loss of coverage on your part.

While life insurance is often perceived as a risk-free financial safeguard, understanding the inherent risks associated with such policies is crucial for informed decision-making. These risks span various aspects of life insurance, from mortality and investment experiences to premium payment obligations.

In universal life insurance, the experience of mortality and investment can significantly impact policyholders. Insurers' practices and assumptions regarding mortality and investment returns can affect the actual cost of insurance and the returns credited to policyholders' accounts. Misjudgments or discrepancies between assumptions and reality may result in higher premiums, lower returns, or the need for additional payments to maintain coverage.

Moreover, the obligation to pay premiums over extended periods adds another layer of risk. Policyholders must adhere to timely premium payments to avoid policy lapses and potential loss of coverage, particularly in permanent life insurance plans.

Awareness of these risks empowers policyholders to evaluate their insurance needs, understand policy terms, and make informed choices regarding coverage and financial commitments. By proactively assessing and managing these risks, individuals can optimize the benefits of life insurance while mitigating potential drawbacks.

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