How Does Life Insurance Work: Most insurers, having invested their first or next payment in life insurance savings, hope to receive investment income from their investments.
How Does Life Insurance Work
As a rule, people compare this investment instrument with a bank deposit, but they forget the main thing for which they acquire a life insurance policy – to take care of the future of their relatives, relatives and close ones in case of an unforeseen event.
The main mistake of the insurer-investor is to think first of all about profits and the preservation of earnings, and not about your life and the fate of loved ones.
If you need earnings – then you are not to insurance companies, to you – to a bank (although today the question is: which bank in Ukraine should you choose ?) Or to the stock market, because Life insurance is a long-term investment with your protection and a guarantee of help to your relatives, but not income.
The editors of Forinsurer often receive “sad letters” from insurers that life insurance companies have been deceived, underpaid, under-donated or ignored. There are many such letters, and the answers, unfortunately, to them will be the same. Anyway, from a legal point of view, the policyholder himself is to blame for everything, who, having not understood the details and believed the insurance consultant, blindly signed the contract.
To simplify, we decided to create a special section on the mechanisms and principles of the insurance system. And so, what are insurers and agents silent about?
Life insurance companies, and most often agents, consultants or insurance intermediaries, often take advantage of the “weaknesses” and mentality of our citizens and play on this, and it is difficult for policyholders to hear what they are saying, or they do not have enough patience to figure it out ( however, even if you read the contract and you have any controversial issues, you still can not change anything in these documents, except for the payment schedule and the number of insurance payments ).
Risks that cover life insurance savings programs:
- survival until a certain period (expiration of the insurance contract);
- death (maybe “for any reason”);
- death due to an accident (double the insurance amount);
- disability of the I-th group.
Rates for life insurance varies within 4-10% of the sum insured, depending on the age ( the younger the insured, the lower rate ), sex ( female tariff is lower than for men ), and a set of risks and programs insurance ( only risk of death, pension, accumulation, death for any reason, or disability )
Let’s look at the main schemes of the insurer’s movement in the context of various insurance programs (risk life insurance in case of a loan provider’s death and accumulative life insurance) depending on the sales channels of life insurance products (direct or agency sales, MLM through network intermediaries or bancassurance – banking channels).
The main sales channels of life insurance and the scheme of their work:
(each scheme opens in a separate window)
- Classic life insurance (through the office)
- MLM life insurance (the most common channel)
- Borrower’s life insurance (bancassurance)
What can we see in the reporting of insurers?
Essentially, nothing. The total amount of formed reserves, the total amount of investment income for the period in monetary terms and in percentage terms ( usually the average “in the boiler” as the average temperature in the hospital ), the absolute values of assets, equity, premiums, payments, redemption amount, quantity contracts and the insured and other indicators of the life insurance companies , which, by equal account, do not show anything about the existing situation about the accumulated funds of a particular client and his income.
As practice shows, the majority of insurers are not interested in the amount of accumulated ( earned, generated ) funds, or, at best, receiving a letter from their insurer with “results of the year” about 12-17% of investment income earned ( in different currencies: dollar, euro , the hryvnia ), immediately relaxes and does not ask unnecessary questions until life forces you to plan your finances and redistribute them in order to save.
Cumulative life insurance and bank deposit are incomparable investment instruments, but they are created to complement each other
The bank deposit always looked more attractive than accumulative life insurance, but do not forget the fact that not everyone understands the reliability of banks – the likelihood that you make a deposit in an unreliable or problem bank is very high. And then the question arises: confusing with the money accumulated on the deposit, which you can not pick up?
Where is my money?
If you have “lost the opportunity or desire” to pay insurance payments for your programs, you become interested in information about the status of your funds, read the contract and/or look for opportunities to withdraw funds from the insurer.
This is where the question of the redemption amount ( in case of wanting to terminate the contract ) and / or the money value of the funds accumulated by the insurer, the taxation of the invested funds ( paying 17% of the income tax on the entire insurance amount … under the new Tax Code ), as well as an incomplete refund state tax credit (on how to get a tax credit for life insurance contracts, we have already written).
As for the return of the state tax credit by the state, the maximum amount of insurance payment under the accumulative insurance contract, from which the calculation is made for tax refunds, will not exceed UAH 18,000. (in the year).
Those. if payment is more than this amount, the state will not compensate for the difference in income tax paid by the insurance company to pay the insurance indemnity.
In the case, if the payment will be received by your relatives (beneficiaries), which will be issued as an inheritance, then after 6 months they will be able to receive the entire sum insured without paying income tax.
What will happen to savings if the insurance company goes bankrupt?
According to the current legislation of Ukraine, in the event of a bankruptcy of a life insurance company or its liquidation for other reasons, the funds of the formed reserves are subject to transfer to another insurer with the consent of the insured or insured person or are subject to transfer to the insured person. The duration of the existence of the insurance company is not directly related to the products it sells.
all accumulated reserves, i.e. The payments you paid do not disappear but are transferred to the obligations of another company that is ready to take a bankrupt insurer’s portfolio, if there are reserves. And if they are not (reserves) … then there is no money.