Professional Insurance Blog

In recent times, there are more indirect investments in the stock market than there are direct ones. Thanks to institutional investors, the private investor has been saved a lot of time choosing and managing his own shares, as well as stockbroker costs which can be a deterrent for some savers. Insurance fund is a major institutional investment which can provide great benefits for the private investor if he will take the trouble to understand their features to know when to use them.

Insurance funds can essentially be divided into three main types: term insurance, whole- of-life insurance and investment bonds. Term insurance and whole-of-life insurance primarily provide life insurance, whereas, investment bonds like the name suggests are investment based.

Term insurance is a temporary policy that insures one for a specific amount and covers a specific period of time. It could range from a period of one week covering death during a holiday to twenty five years covering a mortgage payment. There are regular premium payments that can be reduced, increased or kept the same, during the term of the policy.

What the investor has to take note of here is that money will only be paid to the beneficiaries of the insured if death occurs within the specified term of the policy. In other words, any money invested will not be paid back to the insured if the term expires and the insured is still alive. This feature of the policy makes it the cheapest insurance policy.

A whole-of-life policy, on the other hand, is permanent and spans the entire life of the individual. There are thus monthly premium payments throughout the life of the insured and automatically comes to an end when death occurs. Unlike term insurance, the insurance company has to definitely pay out money in this policy, and this is a feature that makes this policy expensive. It is also possible to receive cash for the money invested if one turns out not to be able to continue with the premium payments. It is however not advisable to use this type of policy as a saving tool due to its costly nature. There are two kinds of whole-of-life policies, namely ‘with-profit’ and ‘without-profit’. A ‘with-profit’ fund invests in shares, whereas a ‘without-profit’ one invests in fixed interest securities such as bonds.

An endowment policy combines life insurance with savings. A specific amount is insured, and regular payments are made towards this amount. It is hoped that at a set rate of interest the premiums invested including accumulating interest can be compounded to provide the targeted amount that has been insured at a specified time. If the policyholder dies before the policy is completed, the higher of the value of the premiums plus any accrued interest on the one side, and the targeted amount on the other will be paid to the beneficiaries. The guaranteed amount constitutes the life insurance aspect of the policy.

Endowment policies are suitable for mortgage payments. In this case, interest on the mortgage is paid by the mortgage holder separately from the premium payments. The total amounts of the premium and the interest they accrue go towards paying off the mortgage loan itself at the end of the policy. This type of mortgage payment is different from the repayment type in which each amount paid has a part reducing the loan amount and another part reducing the interest on the loan.

Investment bonds only have a very small life insurance component. They are mainly geared at making returns on investment. There are unit-linked, with-profit, property and money market kinds. The unit-linked kind can be further subdivided into fixed interest, managed, general, and specialist funds.

‘Fixed interest’ relates to investments in bonds; ‘managed’ has to do with a much diversified portfolio of shares, bonds, properties and so on; ‘general’ involves tracking a particular stock index, e.g. FTSE 100; and ‘specialist funds’ is limited to a specific geographic area or asset class. ‘With-profit funds’ have to do with unit-trust investment; ‘property’ funds deal with investment in commercial and industrial properties, and ‘money market’ funds concern investment in deposits and money market instruments such as CDs and bills.

Life’s circumstances change and every situation will merit its own type of insurance. Although insurance funds are useful, the investor must be careful not place round pegs in square holes or vice versa. Insurance companies are also not all alike, and shopping around before investing will pay high dividends, since for the same type of policy the high-quality companies can guarantee higher long-term payments.

David Opoku
BA Hons. Accounting and Finance. Currently specialising in Financial Advising/Stockbroking.

E-mail: davido312@aol.com
Web: www.investmentyouneed.com