USUAL CLASSIFICATION OF LIFE INSURANCES
|USUAL CLASSIFICATION OF LIFE INSURANCES|
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).