A life insurance contract is most likely the longest financial deal a person may enter into during their lifetime, so it’s good to know where your money is going.  Insurance companies typically function on two dimensions: collecting premiums and managing investment strategies geared to earn additional revenues in the form of interest, dividends, and capital gains.

With term life insurance, all of your payments are put toward the death benefit for your beneficiaries, with no cash value for you at the end if you’re still hale and hearty. So you might hardly call this an investment. Your money is grown in your account for your beneficiaries in case you die during this time, and when maturity strikes, you simply walk away. However, with whole life there are various options for cash value which you can investigate.

But…you might reasonably ask…where do my premiums go?

  • Investment management is of great importance to insurance companies. Huge funds are collected as premiums, and since this money is not immediately required, it has to be judiciously invested in carefully chosen assets to earn optimum returns.
  • Investment specialists calculate the probabilities of insurance claim costs every year against the long-term returns that can be gained from a variety of financial investment instruments, such as government bonds, stocks, debentures, property mortgages, etc.
  • As long-term investors with foreseeable liquidity needs, life insurance companies invest cautiously and bind to well-considered, systematic strategies. All insurance companies are required to have an investment strategy dependent upon the nature of the business underwritten, and which will ensure assets are managed in a sound and prudent manner.
  • Insurance companies must hold sufficient assets to support their liabilities. As they are dealing with large amounts of money, they have to constantly take into account the balance between risk and liquidity. Investment strategies depend upon the nature of the business underwritten, and are influenced by economic, financial and geopolitical circumstances.
  • The stock market is seen as a risky investment for insurance companies because it’s a cyclical market that swings from high returns to market losses. Nevertheless, a portion of their premiums will be invested in the share market.
  • Their preferred investment vehicle remains bonds because they provide a more predictable future cashflow. This is a more cautious approach, creating greater stability.
  • A third investment choice for insurance companies is what is considered a relatively low-risk investment – the property mortgage market. These three asset classes – bonds, stocks and mortgage instruments – comprise about 90 percent of investments for life insurance companies.
  • Investing the premiums does two good things: it increases the insurance company’s profits, and makes it possible for the company to lower its premium amounts, making its policies more attractive to clients.

Strong rules and regulations

While making investments, insurance companies are guided by certain fundamental principles:

  • Safety – this is key because the company is entrusted with the responsibility to pay claims as and when the need arises.
  • Profitability – the company has to ensure it runs its business on a solvent basis, which means they have to invest with long-term vision, acumen and experience.
  • Liquidity – it’s crucial that the company is able to convert investments into cash without undue loss of capital.
  • Diversification – this is the perspicuity to cannily spread the investment over different channels, and not rely on a single class of investment.
  • Solvency – insurance companies must generally maintain a minimum solvency ratio of 150% to reduce the risk of bankruptcy. This means that companies need to set aside the amount that consists of their entire liabilities, and then add a further 50% of that amount.

The insurance sector worldwide is currently broaching a new competitive environment encompassing more complex investments with broader options, better customer services, innovative products, and the rapid development of technology.

Check your policies, check your life

Verifi is an online tool that provides you with an immediate and up-to-date overview of all your life insurance and investment policies by sourcing information from all the major life insurance companies – and presenting the information in a comprehensive report.

With Verifi you are able, for no charge, to access information on all your life and investment policies at a glance. You are able to check the types of policies you have, the names of the insurance companies providing the cover, the nature and extent of the insurance cover provided – and other vitally important information such as the details on your policies being correct.

 

To find out more, please visit: www.verifi.co.za

 

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