Why do I need life insurance?
- How can I ensure a dignified life in old age?
- How can I save for my child’s education?
- Where can I take money, if I need serious medical treatment?
- How can the family’s well-being be provided in the event of a breadwinner’s death?
Each person asks these questions sooner or later in his/her life.
Life insurance programmes give answers, which help prepare for joyful events (a wedding, children’s education, etc.) and create a safety margin in the event of sudden unpleasant developments.
Life insurance practically meets the goals and the requirements of each specific person in a certain period of the person’s life and helps resolve a whole set of financial issues.
What are the types of life insurance programmes?
Life insurance programmes offered by insurers today can be divided into several basic groups:
- Risk life insurance implies insurance protection1 against unfavourable developments for the life and health of an insured person. Risk insurance also exists in the form of credit life insurance where the lender acts as the beneficiary2. This type of insurance relieves the insured person’s relatives of the burden to pay off the loan if the borrower dies.
- Accumulative life insurance offers a possibility to make accumulations for a specific date or event along with life and health insurance cover.
- Investment life insurance is an instrument of investment3, which offers a possibility to receive a potentially high income, if the market grows, and a guaranteed return of the customer’s contribution4, if the market goes down. This insurance scheme offers immediate compensation, if an insured person dies.
Risk life insurance
This term speaks for itself and the mechanism of these programmes is similar to the schemes of car or property insurance. These programmes do not envisage accumulation of funds while insurance payments are stipulated only when unfavourable events occur.
With relatively small contributions (insurance premiums), these programmes offer high insurance protection. An individual can take out an insurance policy for a term ranging from one year to 20 and more years, including an unlimited number of years, and pay premiums on a regular basis. The customer can determine the size of the premium and the desirable volume of insurance protection individually, judging by his/her needs. According to the customer’s wish, risk life insurance often includes additional programmes (options), stipulating, in particular, special payments in the event of disability, injuries and other unfavourable developments.
Accumulative life insurance
This type of insurance combines the functions of creating saving funds and providing insurance cover.
This scheme has the following mechanism: the customer pays the first premium and becomes entitled to insurance cover:
- Under a risk5 of endowment policy6 — the right to the guaranteed receipt of accumulated funds, which the customer will be paid in the future upon the expiry of an insurance policy term.
- Under a risk of ‘departure from life’7 — the right of guaranteed payments to designated people or heirs (beneficiaries) in the event of an insured person’s death.
Such contracts are normally concluded for a term of 5 to 20 and more years. Insurance payments under these two basic types of risks may be equal or differ from each other and will increase with larger premium contributions and longer-term programmes. Therefore, this scheme provides combined insurance cover: the customer makes savings while the customer’s life is insured. Insurance policies are intended, above all, for family breadwinners who financially support other people.
Most customers successfully implement their accumulative insurance schemes and insurance payments they receive allow them to change their living conditions or make large acquisitions, spend money on their child’s education or use it as their start-up capital. Accumulative life insurance contracts stipulate guaranteed income and allow customers to receive additional income depending on the results of the company’s investment activity in each calendar year.
Accumulative insurance programmes can be supplemented with various risk options8 guaranteeing insurance payments to customers when they are diagnosed with fatal (critical) disease and disability, including as a result of accidents and their various consequences.
Investment life insurance
Compared with classic accumulative insurance, this instrument helps reliably invest accumulated funds rather than create accumulations. This scheme allows the customer to receive a potentially high income while guaranteeing the return of the customer’s financial investment. The customer’s investments under investment life insurance programmes are divided into two parts — the guarantee and investment funds. The guarantee fund guarantees the return of the customer’s investment under any developments in the stock market9. The investment fund allows the customer to receive income on an investment product, depending on the dynamics of the underlying asset (there are a multitude of such investment instruments, for example, gold, oil, the RTS stock index and others).
This investment scheme has the ‘insurance coverage’ and, therefore, offers a number of advantages unavailable for other investment instruments. First of all, income on an investment product is taxed at a preferential rate under this scheme. Secondly, this scheme provides life insurance protection for the customer and a special legal status for protecting investments.
Additional benefits of life insurance
Preferential tax regime. Payments under risk events (death, disability, etc.) are not taxed. Income tax on endowment payouts is charged only on the difference between the payout sum and the amount of premiums. Moreover, this difference is reduced by the refinancing rate of the Central Bank of the Russian Federation.
Special status of life insurance policies. These policies are not property and, therefore, may not be confiscated, seized or divided (for example, in the event of a divorce). They may not be claimed by third parties.
Selectivity. Insurance payouts are not included in the inheritance in the event of death and are made to the designated beneficiaries while endowment payments are made only to the insured person. Therefore, you can solve problems related to inheritance or the selective care for a person in a complex family situation and set up an endowment for a child from the first marriage or for a grandson (a granddaughter), for example, and also take care of the most vulnerable person in your family.
Customisation. All long-term programmes are selected and planned individually for each specific person, taking into account all factors and wishes.
What specific factors do I need to take into account when selecting life insurance programmes?
You need to choose a life insurance programme that suits your personal needs. When you select a life insurance programme, you should bear in mind that the programme’s terms can be supplemented with additional provisions or changed to tailor to the customer’s specific needs.
It is important to properly select an insurance company, which you can entrust with such a serious matter as financial protection for yourself and your relatives for a long period. You need to pay attention to the insurer’s work experience, its position in the professional market, the structure of its shareholders, its strategy, its financial indicators and its reliability rating.
You should consider a life insurance programme only as one of the components of your personal financial planning, which is aimed, above all, at your financial security and long-term protection of your savings. You should not use life insurance as a sole financial instrument.
Who protects your rights?
Life insurance covers the sphere of organised financial activity, which is controlled very strictly by the state. The customers’ rights are protected by:
- Bank of Russia (the Central Bank of the Russian Federation, cbr.ru);
- Rospotrebnadzor (the Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing, rospotrebnadzor.ru);
- FAS of Russia (the Federal Antimonopoly Service, fas.gov.ru);
- Roskomnadzor — with regard to personal data protection (the Federal Service for Supervision of Communications, Information Technology and Mass Media, rosohrancult.ru).
What legislative changes have taken place in the sphere of life insurance lately?
- Amendments to the Tax Code of the Russian Federation came into force from 1 January 2014 to extend the preferential tax regime under long-term accumulative life insurance contracts to close relatives. Now insurance payments under these insurance contracts concluded for the benefit of an insured person’s close relatives are exempt from personal income tax.
- Federal Law No.
234-FZ,dated 23 July 2013, ‘On Amending the Law of the Russian Federation ‘On Organising Insurance Business in the Russian Federation’ was adopted and came into force from 24 January 2014.
The amendments are of global nature and define the procedure and terms of insurance activity in the Russian Federation, taking into account the international practice of insurance business regulation. Some changes relate to the transfer of the authority to regulate, control and supervise financial markets, including insurance activity, to the Bank of Russia from 1 September 2013.
- Amendments to the Law of the Russian Federation ‘On Organising Insurance Business in the Russian Federation’ came into force from 4 June 2014 to regulate the procedure of the electronic sale of insurance policies.
The amendments specify the types of insurance policies allowed for electronic sale and place a ban on the activity of insurance agents and insurance brokers for the provision of services related to the conclusion of insurance contracts in the form of electronic documents. Under this law, an insurer is required to sign an electronic document using an enhanced qualified electronic signature while the customer may sign an application for insurance using a simple electronic signature.
1 Insurance protection means an insurer’s readiness to provide financial support to the customer in the form of insurance payout upon the occurrence of an insured event.
2 Beneficiary is the person for the benefit of whom a life insurance contract is concluded (the person entitled to insurance payout).
3 Investment means investing money to derive profit.
4 Contribution means the payment of money under an insurance contract.
5 Risk means the probability of an event whose occurrence triggers insurance payout.
6 Endowment risk means the ability of an insured person to live to a certain point of time, at which this risk either materialises or not.
7 Risk of departure from life means the death of an insured person.
8 Risk options mean probable events whose occurrence triggers insurance payout.
9 Stock market is the market where securities are traded.