Since the possible age of humans is not infinite, if we start to stretch the insurance term
of the above definitions, the term insurance and the endowment insurance “meet”. We
can view this as a new type of insurance, the so-called whole life insurance. Whole life
insurance differs from others in insurance term, which is so long, that the remaining
life of the insured fits into it, this way in any case it will end with the insured’s death,
and consequently with benefit payment. But generally the premium term is limited e.g.
until the insured reaches age 85, and after this the policy is in effect without premium
payment.
Since the term of such an insurance is very long, the question, whether it will surely
be longer than a certain period, e.g. 10 years is meaningless. Yes, it is longer, since the
term is not the same as the period in which the insured is alive. If it were, a policy of
10 years would have to be subsequently redefined to 5 years if the insured would die
at the end of the 5th year. But we never do this, so the term of the whole life insurance
annot be identified with the period until the insured dies, only with a longer, but not
necessarily precisely declared period.61
The features of a whole life insurance are also between a term and an endowment
insurance, e.g. it has a surrender value (see later on – contrary to the regular premium
term insurance which generally does not have surrender value -, but the relaitive size of
this is smaller than the endowment insurances’).
The whole life insurance has special purposes.
Coverage of funeral expenses (ceremony, shrine, etc…). If it is important to the
insured that his funeral should be of appropriately high level, then he can collect
the money this requires through such an insurance in small fractions.
To pay for legacy duty. If the testator doesn’t want the inheritors to sell his
property in order to be able to pay the legacy duty, then it is useful to take out
a whole life policy of a significant sum insured, that will pay exactly when the
legacy duty has to be paid.
Relating to this it is important to mention a very favourable feature (in the Hungarian
law62 and order) of life insurance, namely that it is not part of the legacy, this way the
beneficiary receives it before the – sometimes very long – legacy procedure63. Moreover
the life insurance benefit (as most of the insurance benefits) is generally free of duty.
Unit Linked Insurance
Unit linked insurance that has been introduced in the United Kingdom in the 50-s at
first has been nothing else but the combination of a traditional term insurance and a few
investment funds.64 The client regularly paid a premium to the insurer, which had two
components of fixed size, that the client could also see:
the premium of the term insurance
the premium part filling the investment funds
In the name of the insurance “unit” means that the clients money is accounted in the
asset funds – the same way as in investment funds – in units. Investments are usually
evaluated daily, this way the value of units can change daily, which is brought to the
inquiring client’s knowledge through the internet, or an automatic telephone line (as it
is required by the regulation in force). Units are accounted on the client’s “account”.
The units of the different offered asset funds are accounted within the client’s account
on separate sub-accounts. We get the current value of all money in an account by
multiplying the number of units with their current price.
The insurance company evaluates units on two prices:
the offer price
and the bid price.
Buying and selling are viewed from the insurer’s side, so we can look at it the way
that when the policyholder pays the premium, the insurer sells (offers) him units, so this
is made on the offer price, and when the insurer pays the benefit, he buys units from the
client, so he uses the bid price in this case. The same happens when he subtracts units
from the client’s account during the term upon different grounds.
Naturally, the offer price is higher than the bid price, usually by 5-6%. The difference
is immediately taken at premium payment by the insurer to cover expenses. On the sub-
accounts units are practically accounted on bid price, since after changing the premium
to units all accounting is performed only on this price.
The expenses and profits of the insurer have 4 sources in the unit linked insurance:
- the abovementioned bid-offer spread
- subtraction of certain types of units
- regular subtraction of units from the fund
- fund management fee
Two types of units are distinguished: - accumulation („ordinary”) units
- initial units
What has been said so far regarding units concerns mostly the accumulation units.
The insurer uses the initial units technique to cover initial (mainly) acquisition expenses.
The essence of this is that part of the premiums of the first (or the first two) years (e.g.
the part of the first year’s premium not exceeding 100,000 Forints) are marked, they are
not turned into accumulation units, but to initial units. Formally these initial units work
the same way as the accumulation units, but with one significant difference: A certain
percentage (generally 5%) is subtracted during a certain period (usually 10 years) at the
beginning of each year. After a definite period the remaining initial units are converted
to accumulation units.
The continuous subtraction of initial units is only a way of dressing, since the initial
units to be subtracted during the whole term are in reality subtracted at the payment of
