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Insurance policy structure

As mentioned in the previous article, a life insurance policy is a contract between a client and an insurer. It is a legal and binding contract which sets the parameters applicable to the insurance contract between you and the insurer.

You, the client promise to pay a premium as determined by the insurer. The insurer then promises to provide benefits under the policy which meet your needs in terms of cover for a risk event such as death or disability.

An important aspect of insurance contracts is the concept of insurable interest. There must be an insurable interest in the life of the assured of the contract. Examples of insurable interest are: person in their own life; husband and wife; children in their parents if they are dependent on them; parents in the lives of their children; creditors in the lives of their debtors; business partners’ in each other’s lives and employer in the life of the employee.

Besides taking out a policy and having an insurable interest in the life assured, it is also important that the person taking out the policy has the legal capacity to do so. Legal capacity refers to the person being legally able to take out a contract, that is the person must be 18 years or older.

Depending on your needs, a life insurance policy will be structured in such a way that the client can place a way that you can place a value on your own life and insure it for that value. In addition to the life cover that is on the policy, the client can also add other benefits to the policy, which provide cover for needs such as disability and severe illnesses.

Now, let us look at the roles and responsibilities of parties involved in a life insurance policy.

Insurer
The insurer is the party who accepts the risk and will pay the insured amount when the insured event such as death or disability occurs as stipulated in the insurance contract.

Policy holder or policy owner
The policyholder or policy owner is the owner of the policy and can enter into other contracts with the policy. For example, the policyholder can cede (offer as collateral or security) the policy or surrender (stop) it or make cash withdrawals from it and appoint beneficiaries. The policyholder is responsible for ensuring that the premiums of the contract are paid. Some insurance companies call the policyholder a Contracting Party.

Life Assured
The life assured is the party to the contract whose life is insured by the insurer. The policyholder and the life assured could be the same person. Some insurance companies call the life assured a Life Covered.

Premium Payer
The premium payer is the person who agrees to pay the premiums on the contract for the specified term or until such time as it is no longer necessary. In most cases the policyholder will also be the premium payer.

Beneficiary
The beneficiary is the party who has been nominated by the policyholder to receive the proceeds of the policy. There are two types of beneficiaries:

Beneficiary for proceeds
This beneficiary is nominated to receive the proceeds of the policy in the event of the death of the life assured.
Beneficiary for ownership
This beneficiary is nominated to take over ownership of a policy in the event of the death of the policyholder. This beneficiary then takes over the rights and responsibilities of the insurance policy.
Cedent
When as policyholder you decide to cede the insurance policy, you are known as the cedent.
Cessionary
The person who the policy is ceded to is known as the cessionary. The cessionary becomes the new owner of the policy.

Lastly, remember your insurer must conduct a proper needs analysis before recommending any financial products to you. This will ensure that the recommended product is appropriate to your needs as a client.
The steps your financial planner should take are: establishing and defining a relationship with you; gathering information about you such as names, age, occupation, sex, marital status; analysing your information; implementing the solution; reviewing and monitoring the financial plan.

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