To help you understand your life insurance policy better, we have summarised some of the common terms and provisions that you will come across. Life insurance definition.
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Premium -This is the money you pay to the life insurance company to purchase the life cover. The cover commences upon first premium payment.
Sum assured- this is the amount the policy holder will receive from an insurance company if the insured event occurs or when the policy matures. In other words, this is the total amount for which an individual is insured. This amount does not include the bonuses to be paid.
Claim- An insurance claim is a formal request to an insurance company asking for a payment based on the terms of the insurance policy. Insurance claims are first reviewed by the company for their validity and then paid out to the insured or requesting party (on behalf of the insured) once approved.
With profits policy-This policy allows you to share in the profits of the life insurance company which is usually paid as dividends or bonus. For this privilege, the premium charged is usually higher than for a without profit policy.
Bonus-This is the extra money paid with the final benefit for with profit policies. Bonuses are declared periodically e.g. every year, and once declared the bonus becomes a guaranteed addition to the final benefits payable.
Cash / surrender value -When your life insurance policy has been in force for a certain period (normally 2 – 3 years), it acquires a cash value also known as a surrender value. This is the cash amount a life insurance company will pay you when you cancel your policy. Should you chose to cancel your policy before the specified period; you are likely to lose the money put in through premiums. You should endeavour to maintain your policy until maturity to get the full benefits.
Policy loan- You can apply for a policy loan when your policy has acquired a cash value. Interest is charged on the policy loan. At maturity or in case of a death claim, any unpaid portion of the loan is deducted from the benefits payable.
Grace Period -This is an additional period of time after the due date for the premium payment. The grace period for monthly premium payments is 30 days. If premium is still not paid within the grace period, your policy may lapse or be subjected to reduced paid up or automatic premium loans (as explained below)
Term life insurance options
Reduced paid-up- For a policy that has acquired a cash value, you can choose to stop paying premiums but still have the policy in place. The policy will continue to remain in force until maturity but the sum assured will reduce. This is an alternative choice for individuals who no longer require a high sum assured but would still like to have some level of protection
Automatic premium loan (or non-forfeiture advance)- If you do not pay your premium within the grace period, and provided your policy has sufficient surrender value, the life insurance company will automatically advance to you the premium amount to keep the policy in force for a stated period. Interest will be charged on the amount of premium loan outstanding. An automatic premium loan will reduce your surrender value.
Grace period for review of policy document- You may cancel your life insurance policy by returning the policy document to your insurance company within 15 days after you received it, if you feel it does not reflect the cover agreed upon at the time of purchase. The premium that you have paid (less any medical fees incurred) will be refunded to you.
Occupational (Employment-based) Retirement benefit schemes- This is an arrangement that an employer establishes to provide retirement benefits for its employees. The scheme is set up under a binding trust and it operates as a separate legal identity from the employer..
Defined contribution scheme- this is the amount or rate of contribution determined at the start of the scheme. At the time of retirement, the overall benefit is determined by the total amount of contributions and the accrued interest earned on the contributions. For example, 5% of an employee’s salary may be deducted every month, and together with the employer’s contribution, paid to the scheme.
Defined benefit scheme –this is where an employer promises a specific monthly benefit at retirement which can be estimated in advance based on factors such as age, earnings, and years of service. The "cost" of a defined benefit plan is not easily calculated, and requires an actuary to do it. However, even with the best of tools, the cost of a defined benefit plan will always be an estimate based on economic and financial assumptions.
Additional Voluntary Contributions (AVC) -AVCs offer a cost-effective way to increase your pension fund if you have a company pension scheme. Company pension scheme contributions are normally made up of: a) your own regular contributions and b) an amount from your employer. AVC is when you want to increase the value of your pension fund to provide additional benefits for yourself or because you started saving for a pension late in life. One option is to make 'top up' payments from your salary, so you'll receive a larger pension when you retire
Segregated funds –This fund is normally adopted for schemes with very huge funds running into billions of shillings to enable the scheme to take advantage of the economies of scale in terms of investments and afford the investments costs. The investments risks and costs are directly borne by the members of the scheme. Any drop in the funds as a result of an investment risk, directly reduces the member’s benefits.
Guaranteed Funds –These funds are only offered by Life Insurance Companies. Contributions from clients are pooled together and assets of the pool invested in a diversified range of assets. The creation of a huge pool of funds has the advantage of economies of scale in investment. Each year, interest is credited at the declared rate which depends on economic conditions and returns on investment. Unlike segregated funds, guaranteed funds have the unique advantage of offering binding guarantees against capital depreciation, in addition to specified levels of minimum future earnings. The Guaranteed Funds offers formidable security due to the fact that the fund forms part of the statutory fund that Life Insurance companies must maintain and this is strictly regulated under the Insurance Act.
Individual Personal Pension Schemes- Another category of retirement benefit schemes is the individual retirement benefits schemes. These are normally established and run by insurance companies and are available to any member of the public who may be self- employed or persons who although employed do not belong to an employer sponsored retirement benefit scheme.
Trust - A trust is a fiduciary arrangement that allows a third party referred to as a trustee, to hold assets on behalf of a beneficiary or beneficiaries. These assets could include things like money, title deeds, life insurance policies and other investments. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.
Trust deed and rules- The trust deed and rules is the document that creates a Trust. Given its importance, it is necessary to obtain professional advice in its preparation. It contains rules and operational details of the scheme and everything that needs to be known about the trust. If a Trust creates a Pension Scheme, it is important for the trust deed and rules to be created within the provisions of the Retirement Benefits Act. For adequate protection of the sponsor and members, the Retirement Benefits Act requires that schemes should be established by a binding trust and that the scheme documents be professionally prepared.
Trustee- This is a legal term which, refers to any person who holds property, authority, or a position of trust or responsibility for the benefit of another. A trustee can also refer to a person who is allowed to do certain tasks but not able to gain income.
Sponsor - A sponsor is a person who establishes a scheme. In occupational retirement benefit schemes, employers are usually the sponsors.
Scheme Administrator -This is the person/institution responsible for day to day running of the Scheme. The administrator is usually appointed by the trustees to administer the scheme on their behalf. Some of the functions of administrators include:
Liaising with trustees, regulatory bodies and service providers.
Preparing member certificates and fund balances
20 year term life
Ensuring full compliance of the scheme regarding the provisions of the Retirement Benefits act.
Arranging for member's annual general meetings.
Fund manager - A fund manager's role includes the management of funds and other assets of a scheme. Investment management firms play this role. Another important role is to give advice and ensure investment of scheme funds are in accordance with the adopted investment policy.
Custodian -A custodian's role includes taking responsibility for the safe custody of what is contained in the trust such as funds, policies and other documents and financial instruments. The regulation under the Retirement Benefits Act requires that pension scheme assets be held and maintained by the custodian except where funds are fully invested in guaranteed funds. In such circumstances contributions are paid directly to the approved issuer.