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Life insurance, savings policies and investment policies

Various types of savings and investment policies

The savings and investment policies are product intended for long-term saving and investing. The savings and investment policy products aim at a return accumulating on the saved sum or at providing security in case of death. Pension insurance policies add supplementary security in view of retirement. Insurance investment also encompasses so-called capital redemption policies even if they do not involve a designated insured person.

Typically, the savings or investment policy either have an interest linkage, in which case the savings or return accumulate on the basis of an agreed interest rate (rate of guaranteed interest) or other bonuses, or it may be an investment-linked policy where the calculation of the product value added is based on chosen investment elements. The investment-linked products also include the risk of capital loss, in other words, also the investment capital can be lost unless it is protected with specific measures.

Saving and investment policies, as any investment products, follow the general principle of risk and return being closely linked. If a product is associated with a consistent expected return, the risk is equally great. In turn, products with a more moderate return also have a smaller risk.

The savings and investment insurance policies come with different tax benefits. However, the taxation benefit may have the consequence that the sum saved in the pension insurance policy, for example, may be bound by certain rules so that it cannot be taken out (surrendered), except in certain exceptional circumstances mentioned in the policy terms.  The surrender of the assets during the savings time, i.e., prior to the agreed expiry of the insurance, may result in significant surrender expenses. The amount of the surrender expenses may depend on period of time the contract has been in force.

The compensations from life insurance, as well as any other insurance savings products, are associated with various taxation benefits which depend on the nature of the insurance and the relationship between the insured person and the beneficiaries. However, the taxation benefits may be subject to political decision and amendments of the tax legislation, made even after the signing of the insurance contract.

Risk life insurance

Life insurance policies can be divided into risk life insurances and life insurance savings policies. The term risk life insurance refers to a policy where the insured risk is the person’s death. When the insured person dies, the designated beneficiary will receive a death benefit, or the sum insured (benefit). The risk life insurance does not contain a savings or investment element, but the insurance premium is determined mainly on the basis of the insured risk (or, for example, the sum insured and person’s age).

The risk life insurance makes it possible to secure the family’s or other beneficiary’s maintenance in case the insured person dies. The need for a life insurance cover is emphasised when the family has small children and a lot of housing loans. The life insurance cover is also important when the family’s maintenance is mainly shouldered by one person only.

Life insurance savings policy

The life insurance savings policy includes a benefit paid out to the insured person if they are alive on a particular moment agreed in advance. If the insured dies before this moment, the savings sum remains with the insurance company. It may be possible to include a cover for death in the life insurance savings policy. The amount of the death cover is determined differently in different products. The life insurance savings policy where you make a larger investment in one go, may also be called single-premium endowment policy.

The performance of the savings accrued under a life insurance savings policy may be bound to a particular fix interest rate (rate of guarantee interest) in which case the savings sum accumulates according to this interest rate, plus certain other bonuses.  The life insurance savings policy may also be a unit-linked life insurance whereby the benefit grows or diminishes according to the trend in the value of the investment products which the life insurance policy’s calculated value is tied.

Health statement

When applying for an insurance with death cover, the health statement is required, with information on the state of health of the insured person. It is important to give correct and complete answers to the insurance company’s questions. Providing wrong or incomplete answer may lead to the failure to obtain compensation or that the policy is terminated.

Beneficiary clause

When a life insurance policy contract is made, an agreement is also made on the beneficiary of the insurance. A beneficiary may be a named person or based on a general beneficiary order, for example, “the immediate family members”. Especially when the insured wants to nominate a non-married partner as the beneficiary, it is advisable to give the exact name of the person in question. The insured should take care of the beneficiary clauses to be updated. The beneficiary clauses can be changed during the period of validity of the insurance. A new or changed beneficiary clause must be sent directly to the insurance company in writing.

The beneficiary of a life insurance savings policy may be either the insured themselves or another person. For example, a close family member can be named as the beneficiary of the life insurance savings policy for the purposes of asset transfer.

Pension insurance policies

The statutory pension security can be supplemented through voluntary or individual pension insurance policies. The voluntary pension insurance is a means to save funds which will be paid during the pension period (a particular period of time) at regular intervals, for example, on top of the statutory monthly pensions. Pension insurances can also have an interest or unit linkage.

It is characteristic of voluntary pension insurances that the purpose of the insurance is long-term saving. This has been considered in the pension insurance taxation. The funds saved under the voluntary pension insurance policies have been tied in a way that they cannot be taken out at any time upon one’s own discretion. The savings in a pension insurance can be surrendered only in certain situations defined in the policy terms, for example, in case of a divorce or long-term unemployment.

In addition to the pension insurance policies taken by the insured, the employers can also acquire supplementary pension rights for the employees from life insurance companies and pension funds and industry-wide pension funds.

Capital redemption policies

Capital redemption policies are fixed-term investment contracts. A capitalisation police is a contract between the insurance company and the client, with no insured person involved. The expiry of the contract is thus not tied to the life or death of any person. The contract expires and the funds can be taken out at a pre-determined time.

Capital redemption policies can have an interest or unit linkage. The charges and expenses of capital redemption policies are determined in the same way as in life insurance savings policies. Capital redemption policies are covered by certain provisions related to insurance policy contracts, for example, the provisions of the Insurance Contracts Act regarding the information to be given prior to the signing of the contract.