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Types of insurance what are they and how do they work

Life insurance is considered one of the most popular types of insurance worldwide. However, until now, not everyone in Russia knows what this policy is for and how to use it. We figured out what life insurance policies are and what their real benefit is.

Life insurance: what is it

Life insurance is a type of insurance that provides for the protection of the financial and property interests of the policyholder in the event of his death or the occurrence of another insured event related to his life and health. By default, it is death that is the main insured event under such an insurance contract. In practice, the policy can be extended by other risks – illness, disability, etc.

In a broad sense, life insurance often refers to a whole range of insurance products aimed at the personal needs of the insured, for example, insurance against job loss or pension insurance.

How Life Insurance Works
Life insurance is arranged approximately the same in all countries and implies, as a rule, a regular long-term relationship between the insurance company and the policyholder. First of all, life insurance is aimed at two universal risks: survival to a certain age or death of the insured. However, there may be other risks in the policy, such as bodily injury or work injury, disability or accident.

Usually, life insurance policy premiums are paid regularly for a certain time, for example, before the occurrence of an insured event. Depending on the type of life insurance, the sum insured can be paid only in case of illness, death of the insured or other insured events specified in the contract.

There are products that provide for the payment of the sum insured, even if nothing happens to the client and he safely survives until the end of the contract. In such policies, the fact of survival is equated to an insured event. Upon survival, the accumulated amount is paid plus the investment income that the insurance company earned during this time by investing funds received from the insured.

The benefit for the policyholder and his relatives when concluding a contract with the risk of death or accident lies in the fact that the client or his relatives receive an insurance payment upon the occurrence of any insured event specified in the contract, even if only one installment was paid before. However, it must be borne in mind that the contract may contain different insurance amounts for different insurance events. For example, in case of death or disability of the insured, 100% of the sum insured may be paid, and in case of injury or illness, 50% or less.

Types of life insurance

Risk insurance
Most often, life insurance involves the realization of one single risk – the onset of death. In this case, the policyholder pays for the policy (one-time or regular payments), and in the event of death, his relatives (or those whom he indicated in the insurance contract as a beneficiary) receive an insurance payment.

An additional type of risk insurance can be called mixed insurance, when the policyholder receives a payment in case of illness or work injury. The peculiarity of this type of insurance is that the risk can occur at any time, and the policyholder may not have any savings under the policy. At the same time, the policyholder can choose the type of risk, the type of injury, etc., as well as the insurance period. This type of insurance is very popular among representatives of dangerous professions. However, it is important to remember that the insurance company will take into account how dangerous the insured’s profession is, and in some cases may refuse insurance or significantly increase the cost of the policy.

Another type of non-life insurance is called credit insurance. Under such an agreement, the payment is received not by the policyholder, but by the bank in which he has a loan. For example, such a scheme is in demand when concluding a mortgage loan: the borrower can insure himself not only against death, but also against illness, job loss, etc.

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“The main difference between risk life insurance and other types is that the client buys a policy, and compensation is paid only upon the occurrence of an insured event – death, illness, etc. In other types of life insurance (for example, in endowment) there is still survival, that is, the insured event may not occur during the term of the contract, and insurance compensation equal to the sum of all insurance premiums plus investment income, it will still be paid at the end of the contract, “comments Yulia Korneeva, product owner of insurance products at Banki.ru.

Endowment insurance

In fact, endowment life insurance is a universal piggy bank, only the funds are accumulated not in a bank account, but in an insurance company. Within a certain period, the client pays the full cost of insurance in separate payments. If the insured event occurs before the expiration of the policy, the insurance company pays the sum insured in full. In terms of profitability, a deposit in a bank, as a rule, is more profitable. But endowment insurance also has its advantages: if suddenly the policyholder dies before the end of the accumulation period, his heirs will receive the entire insurance amount in full, and it may be more than the amount of actually paid contributions. From the deposit, the heirs receive only the amount that lies on it. At the same time, the final recipient of the money can be any person chosen by the policyholder and indicated in the insurance contract as a beneficiary.

Investment insurance

In this case, the insurance company acts as an investment player who invests the insured’s funds with the expectation of making a profit. At the same time, savings can be divided into two parts: firstly, this is the guarantee part, which a person will receive regardless of the market situation, and secondly, the investment part is tied to the level of profitability. What share is accounted for by guarantee payments is spelled out in the insurance contract, which is recommended to be carefully read in advance.

Often, the client is offered a choice of several strategy options: aggressive or conservative. Usually, the first includes investments in less risky instruments, such as bonds, and the second includes riskier investments, such as shares of growing companies. However, unlike deposits, investment insurance has a serious limitation – such deposits are not insured in any way.

“Of course, in fact, both investment and endowment life insurance are more related to such a financial instrument as deposits, savings and investments. Insurance here is, in fact, a by-product. But it is precisely the fact that, regardless of the amount of premiums paid, in the event of an insured event, the client receives the insured amount in full, makes this tool interesting from a financial point of view both as a funded and as an insurance product, “explains Yulia Korneeva.

Voluntary pension insurance
In many ways, this type of insurance intersects with endowment insurance: the client also makes regular contributions, but in this case, payments begin after reaching retirement age. At the same time, the policyholder can choose the period in which he will receive payments. If something happens to him, the balance of the accumulated funds in the account will not disappear, but will be paid to relatives. Moreover, payments can be quite flexible – for example, a person can assign himself a pension at the age of 70 to 80 years.

Who needs life insurance and why?
Traditionally, it is believed that first of all, life insurance is necessary for those who work in areas where the risk of damage to health is quite high. But in reality, such insurance can be useful to anyone. It is life insurance that makes it possible to compensate for the shortcomings of the social security system: to receive a full benefit in case of loss of working capacity, as well as a higher pension after a certain age. At the same time, this type of insurance allows you to combine different products within one policy, a striking example of which is endowment or investment life insurance.

In some cases, a life insurance policy may be almost mandatory – for example, when obtaining a mortgage loan. To obtain a mortgage loan, only property insurance is mandatory by law, and a life insurance policy is considered voluntary. However, until the housing is built and there is nothing to physically insure, you need to insure the life of the borrower. It is also important to remember that often for life insurance, the bank is ready to reduce the loan rate. Therefore, if at some point you stop taking out this insurance, the loan rate may increase again.

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In general, a life insurance policy allows the insured or his relatives to save the family budget in the event of an insured event.

What affects the cost of life insurance

The cost of the policy depends on many factors. It is influenced, for example, by the state of health of the insured, the presence of chronic diseases, the danger of his work, etc. In general, premiums are most often increased for elderly people with poor health, as well as for policyholders with bad habits, for example, smokers or active drinkers. The younger the policyholder, the lower the cost of insurance for him.

If there is a proven disease, the insurance company may refuse insurance. However, there are situations when a proven disease is simply prescribed as an exception in the insurance contract: in the event of an insured event from this disease, the premium will not be paid.

“In any case, it makes no sense to mislead the insurer – it is better to warn in advance about all the diseases that exist. In the event of an insured event, before paying the sum insured, the insurance company will make a request to the medical institution in which the insured was observed. If it turns out that at the conclusion of the insurance contract, some details about the state of health were hidden, the payment may be denied

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