Recent posts

Life Insurance Classification in the English

Life Insurance Classification in the English
Life Insurance Classification in the English
 Literature The English literature handles categorization in a much more practical way even compared to the above discussion. The volume CII (Chartered Insurance Institute), that – in a certain sense – serves as an official curriculum in England, discusses life insurance under the title “Basic types of long-term insurance policy”95: “..., as a brief revision and introduction to those policies, you might find it useful to think about the vast range of policies as falling in one of the sections of the pie chart below. 

Investment Sickness Insurance Life Assurance Some of the policies you will encounter will fall easily into one of these sections, being entirely either life insurance, sickness insurance, or investment-based, but others may fall under two or even all three sections. Consider the following examples, and decide where each of them could most appropriately be placed in that chart.
• term assurance
• endowment assurance
• whole of life policies
• permanent health insurance
• annuities.”
The Site gives the following solutions:
• term assurance = pure life insurance,
• endowment assurance = minor part life assurance, major par investment,
• whole life = major part life assurance, minor part investment,
• permanent health insurance = totally health insurance,
• annuity = important type of assurance, but cannot place it in the diagram. He also remarks that: “Finally, you will probably be aware of a number of other types of contracts not mentioned above, such as “critical illness policies” (being partly sickness insurance, partly savings, and also usually partly life insurance) and “long term care” (sickness insurance).” The volume „Life Insurance”96 of imposing size, that has a history of a century doesn't deal with the categorization of life assurance in a comprehensive way. As an introductory remark it says that “The simplest form of life insurance protection is yearly renewable term (YRT) insurance.”97 It gives the following definition of this type of insurance: “Yearly renewable term life insurance provides coverage for a period of one year only, but guarantees the policy owner the right to renew (i.e., continue) the policy even if the insured suffers poor health or otherwise becomes un insurable. Each year’s premium pays the policy’s share of mortality costs for the year. The renewal premium rate increases each year to reflect the annual rise in death rates as age advances.” After this the author considers the discussion of premium payment types to be most important. He only returns to the categorization in a later chapter (“Overview of types of life insurance”)98: “As suggested in Chapter 2, life insurance policies can be constructed and priced to fit a myriad of benefit and premium-payment patterns. Historically, however, life insurance benefit patterns have fit into one or a combination of three classes:
• Term Life Insurance
• Endowment Insurance
• Whole Life Insurance” He also mentions that: “Another class of insurance issued by life insurers is annuities… Most annuities are savings instruments designed to first accumulate funds and then systematically to liquidate the funds, usually during one’s retirement years. The above life insurance classification scheme remains valid today, although it is not always possible to determine at policy issuance the exact class into which some types of policies fall. As discussed in Chapter 6, some policies permit the policy-owner flexibility effectively to alter the type of insurance during the policy term, thus allowing the policy to be classified as to form only at a particular point. For presentation purposes, these flexible forms of life insurance are discussed as if they were an additional classification, even though all can properly be placed (at a given point in time) into one or a combination of the three traditional classes.” The following discussion is also interesting. Term assurance and endowment assurance appear in the same chapter, as sub-chapters, but the Whole Life, the “Flexible-premium Life Insurance Policies” (the 6th chapter) and the “Annuity and Special-Purpose Policies and Benefits” received separate main chapters. Concerning endowment assurance it declares that “There are two ways of viewing endowment insurance: in terms of (1) the mathematical concept, and (2) the economic concept. Mathematical Concept. The insurer makes two promises under endowment insurance: (1) to pay the face amount if the insured dies during the endowment period, and (2) to pay the face amount if the insured survives to the end of the endowment period. The first promise is identical with that made under a level term policy for an equivalent amount and period. The second introduces a new concept, the pure endowment. A pure endowment promises to pay
the face amount only if the insured is living at the end of a specified period; nothing is paid in case of prior death. Pure endowment insurance is not sold as a separate contract in the United States. It is said that few people are willing to risk the apparent loss of all premiums paid in the event of death before the end of the endowment period. … Economic Concept. Another analysis of endowment insurance, the economic concept, divides endowment insurance into two parts: decreasing term insurance and increasing savings. The savings part of the contract is available to the policyowner through surrender of or loan against the policy.” Chapter 6. mostly discusses the Universal and the Variable Universal Life type assurances. It is interesting that Life Insurance, Theory and Practice, that was also published in America a few years earlier, has also lived many publications and is also a thick book – although splits assurances into similar groups – doesn’t define the same categories as Black and Skipper. In the chapter “Basic Types of Life Insurance Policies”101 it writes the following: “Life insurers issue numerous types of life insurance contracts. Many of the policies are special combinations or variations of what are often considered to be the basic forms of life insurance: term, whole life, and universal life.” The authors insert here in a footnote that: “Life insurers also write annuities … Some persons like to argue semantically that annuities are the only form of true life insurance as they insure persons against outliving their income. These persons argue that what is called life insurance should be called death insurance as it insures a person against loss caused by death.” The very beginning of the chapter emphasizes that two important variations must be remembered: the insurances called variable life and variable universal life. The authors handle “other” life assurances in a separate chapter (“Product Diversification and Special Purpose Policies”). They find that many types of new insurances have been introduced in the ‘70s and ‘80s that give the customer many new options. This had the effect that „In recent years, the diversification trend has resulted in some blurring of the demarcation lines that traditionally distinguished the various types of financial institutions. Most observers predict that further breakdowns in institutional distinctions will occur as diversification continues.”102 The first special purpose insurance it discusses is the endowment insurance. „Although once considered to be one of the basic forms of life insurance, endowment coverage has declined drastically in popularity in recent years, partly due to the development of more flexible products, such as universal life. During 1984, less than half of 1 percent of all new ordinary insurance purchased was endowment coverage.”103 Funny, that although both books have the title “Life Assurance”, both discuss health insurance and different kinds of welfare plans in full detail without considering them conceptually as life assurance.




The study of life insurance is an applied science. Its subject, life insurance has been created based on practical considerations centuries ago (or thousands of years ago – according to other opinions) and it has developed by practical challenges, not theoretical discoveries. Because of this, the theory also tried to follow and reflect these challenges and did not aim at the axiomatic structure of the “classical” sciences (primarily mathematics and physics) that serve as examples to other sciences. This way – although it would seem as a necessary first step and basic requirement – there is no widely accepted common categorization of life insurance, but it changes from author to author, is strongly inferior to the later matter, and usually gives an ad-hoc impression. Now let’s look at a few examples from the Hungarian and the English literature. Categorization of Life Insurance in the Hungarian Literature
In the Hungarian market, considering questions of insurance theory it was Dr. Dezső Csabay in the last decades, who has created the most enduring foundations, and his writings serve as a standard up to our days (although in many respects it would be useful to rethink them). Considering life insurance he88 states the following under the title “The Classification of Life Insurance”89: “
There are several usual classifications of life insurance according to several aspects:
I. According to the conditional or unconditional liability of the insurer. …
II. According to conditions depending on the health status of the insured: normal or abnormal (high risk) life insurance.
III. According to the insurance benefits: capital and annuity insurance.
IV. According to the insured event: term endowment, pure endowment insurance and annuity.
V. According to business management, mostly based on the administration and transaction method of policies: a) major life (or regular life), b) minor life (or popular, or industrial, workman) c) group insurance” The individual (life) insurance products themselves can be further categorized according to several aspects90: By the type of premium payment: 1. single premium 2. annual or monthly premium (recurring premium) a) fixed (level) premium b) variable premium

As per the number of insured:
1. single life insurance
2. double o multiple life (mutual) insurance „The most important categorisation of insurance products is categorising based on the purpose of the insurance – or the insurance term. Basically all products of this aspect can be derived from two basic products or their different combinations. We distinguish four main types:
1. Term insurance, ….
2. Pure endowment insurance, … annuities belong to this type, …
3. Endowment insurance, which is the combination of the two above …
4. Fix term insurance …”91 dr. Csabay makes similar statements 10 years later92: „LIFE INSURANCE is the most important type of the personal (sum)insurance branch. It is an insurance where the declared sum assured is to be paid when the insured lives to a fixed date or a fixed age (pure endowment insurance), or upon the death of the insured (term insurance), or in both cases (endowment insurance). Annuities also belong here (recurring, periodically payable pure endowment insurance).” “The different types of life insurances are usually divided into several groups. These are the major life (or regular) insurances of greater sum assured, and the minor life (or “popular”) insurances of smaller sum assured; in the western world: industrial or workers’ life insurance, short term life insurance (risk insurance) type credit insurance, group insurance, etc. The insurance types of the individual groups are divided to insurance products (or tariffs) – according to their purpose. The three major products are: term, pure endowment and endowment insurance. All of these exist in a number of forms.” The few remarks on the next couple of pages are also very interesting and typical, although they cannot be considered totally accurate in an actuarial sense: “With the exception of the pure risk insurances (term and pure endowment) the net premium of the other life insurance types consists of two main elements: a risk premium and a savings premium. (Premium reserve.) In the western insurance literature life insurance with a fixed sum assured – in order to differentiate from annuities – is sometimes also called “capital insurance”. A lot of insurance theoreticians and lawyers since the 19th century consider the endowment (and the pure endowment with premium refund) insurance according to its economic purpose not as insurance, but as a savings deposit, because it contains only a minor risk element.” László György Asztalos in 1995 stated – basically agreeing to the above classifications in the chapter “the categorization of life insurances”93, that “An individual life insurance policy can only be categorized  professionally defined by applying at the same time (using a combination of) several, at least the following 6 aspects (groups).” These are: A. the purpose of the insurance policy, B. the date(s) related to the insurance policy, or the term, C. the mode of benefit payment, D. the number of insured lives, E. the technique of premium payment, F. the return of yields. Variations of the first aspect are: „The purpose of the insurance is in every case that the insurer takes over the risk caused by the uncertainty of the duration of life. All insurance products can be listed under one of the 4 basic types.

1. In case of the term insurance the sum assured is to be paid in the event of death of the insured, that can occur at any time (Whole-life Policy). If, on the other hand the insured doesn’t die during the term of the policy, the insurance contract expires – without any benefit payments received from the insurer.
2. In case of the pure endowment insurance (Versatile Endowment Policy) the insurer pays only if the insured survives a fixed age (survival age).
3. In the combination of the above two methods, in case of endowment products the insurer pays the benefits if the insured
(a) dies before reaching a specified age, or
(b) reaches the specified age alive.
4. In case of the so called term fix (fix term, “a terme fix”) insurance it is not the fact of death or being alive that is important, but (the time of) some other event that may not even happen. At this time the sum assured is paid under all circumstances,
(a) either to the living insured person, or
(b) the beneficiary that the insured has declared in advance (e.g. inheritor).” Interesting in the above categorization is that – uniquely in the literature on the subject – it identifies term and whole life insurance, and the author only mentions annuities in the subgroups of aspect C).