THE MOST IMPORTANT LIFE INSURANCES 1-Term Insurance




Term Insurance We have already seen the definition of term insurance above. Based on this it seems that the functioning of the insurance means that the money collected by the risk community will go to only a few, to those (or persons connected to those) who die during the insurance term. Because of this it is possible to receive relatively high levels of benefits with low levels of contribution, but this has the price that in case of living through the term nothing is received (since the collected premium has been distributed to the beneficiaries related to the deceased). When using a term insurance, the most important thing to consider is that a death in the life of the family – if it is the death of a wage-earner – causes great difficulties, or it may even lead to total bankruptcy. The more the life of the family depended on the wage-earner, the greater the bankruptcy. Example: A 30 year old woman raises two children on her own, and at the same time is building a house. She thinks that if everything goes well, the building operations will be finished in 5 years. If, on the other hand something happened to her, a term insurance sum would save her children from bankruptcy. This way she takes out a 5 year term insurance policy. Every family can be regarded as an enterprise. A distant example is: a small factory works with two high-capacity machines on 100% utilization, with constant over-ordering and constantly renewed loans necessary for further development. If one of the machines suddenly has a break-down, this small enterprise can be auctioned. (Not to mention the stress that this constantly threatening possibility causes.) This way in all such enterprises the machines are insured against such “outage”. In the family the wage-earners are such “highcapacity machines”, and the term insurance corresponds to the outage insurance. It logically follows that from this analogy we immediately move on to the area of enterprises. Here the entrepreneur himself is a “machine” of even higher capacity, so losing him would cause an even greater problem to the family. During the normal operation of the enterprise death (due to physical wear and tear) or accident can happen to anyone. Enterprises are responsible for their employees, which also means that the enterprise has to provide for the family of its employees, this way – although in Hungary not many of the managers think this way yet – it is almost a duty of the enterprise to arrange for the negative financial consequences of such an event. The responsibility is general, and every manager has to know this. This way the government often allows enterprises to account the premium of the term insurance policy he pays in favour of the employee as expense (this is the situation also in Hungary). According to the above thoughts we recite a few concrete situations when it is useful to take out a term insurance: • Term insurance is the “cheapest” insurance in the sense that the benefit received is greatest compared to the premium paid. This way this type of insurance can especially be recommended to people who at present are not in a financial situation to have savings of greater volume. These can be for example young householders, who are currently trying to build the bases of their living (building a house, starting a business, etc…). They don’t have much money that could be saved up, but are afraid that their family could be deprived of a promising possibility of financial prosperity due to their sudden death. • In relation to the above example we can also mention using term insurance as a credit life or loan insurance. If the guarantee of repaying a loan on an enterprise or simply on building a house is the entrepreneur or the householder himself, his family is in a difficult situation if he dies. This situation should be parried by a loan cover, or credit life insurance. Some insurers provide the option to the client of taking out a risk insurance rider or riders with shorter term or terms beside a term insurance main policy. This option might be useful in both of the above two cases. This way the policyholder can achieve a higher sum insured in the first part of the term. In the first example this could be useful, because if he dies earlier, raising his children requires more time and also more money than if he dies later. In the second case its reason would be that the capital of loan to be repaid decreases in time, and this way later on a smaller sum insured provides sufficient cover. A further – more general – area of use of this plan is to level out earnings inequalities within the family. In the consuming structure of a family husband and wife both spend about half of their total joint income. So if the income of the wife is higher, she consumes less than her actual income, and her husband consumes more than his actual income. In case of such asymmetric earnings the loss of the partner is particularly threatening for the party with lower income. Here the life insurance on the partner with higher income serves to evade the financial consequences of his death.  

Ref: JÓZSEF BANYÁR: LIFE INSURANCE