Life insurance: key contract details to note
From cash value to surrender value, Comparis explains the key terms featuring in a life insurance contract.
iStock / Joao Serafim
Cash value
Cash value is the current value of all premium payments over the whole contract duration. It is calculated based on a fixed percentage by discounting all future payments at the current date. Cash value indicates how much money must be invested today at a constant rate so that all future premiums can be paid. With this method, the different insurance products of the life insurance companies can be compared.
Actuarial reserve
The actuarial reserve is the accumulation of and interest on savings portions of premiums, i.e. the premium minus the administration costs (agent commissions, policy administration, etc.). This capital is considered as accrual in order to fulfil the future payables.
Extent of coverage
The extent of coverage is the benefits that can be received from the insurance company.
Guaranteed insurance sum
The stated insurance sum in the event of death is independent from the financial success of the insurance company or other factors.
Premium guarantee
The insurance company guarantees the premium amount which was agreed upon at the beginning of the contract duration for the whole contract duration. This guarantee is independent from the financial success of the insurance company.
Exclusion of risks
The exclusion of risks is a means to limit risk. It means the exclusive preclusion of a hazard from insurance coverage. No claim against the insurer arises from damage caused by such hazards according to the contract.
For whole life insurance, the risk of suicide is usually excluded from insurance coverage for a certain period (normally 3 years). Therefore, suicide is not covered during the first three years and the sum insured will not be paid out in such an event.
Some providers do not exclude the hazard of suicide, but cover this risk only with the actuarial capital, which is significantly lower than the sum insured.
The insurance company's obligation to pay the benefits remains in place if suicide was committed in a state of mind in which free decision-making was rendered impossible due to a pathological mental disturbance.
Sum insured
The sum insured is stipulated in the insurance contract. It indicates the agreed maximum benefit to be paid by the insurer. For level whole life insurance, it is the amount the beneficiary receives from the insurance company in the event of death. In the case of decreasing whole life insurance, on the other hand, the sum insured decreases each year by a certain amount.
Many insurance companies require a minimum sum insured for life insurance products. For whole life insurance, it is usually 10,000 francs. There is not always an upper limit, however, so it is quite possible that the maximum sum insured is not limited.
Contract duration
Contract duration means the time period in which the insurance protection is guaranteed. It corresponds to the policy period.
Policy period
Policy period means the period of time within which insurance protection is granted. It corresponds to the contract duration.
For most life insurance types, you can freely choose the duration within certain limits. Minimum terms are usually only a few years, while maximum terms are settled in various ways. With whole life insurance products, the policy period usually varies from 10 to 35 years.
The policy period should be in line with the purpose of the coverage. For example, if you wish to assure maintenance and education of minor children, the contract should be effective until the time the children are expected to be economically independent.
If the risk insured with a whole life insurance (event of death of the insured person) occurs within the policy period, the beneficiaries are paid the benefits insured. If the risk insured does not occur by the end of the policy period, the contract expires.
Event of death
In insurance-related terms, the event of death means that the insured person deceases within the insurance policy period.
In the event of death of an insured person, the insurance company has to be notified immediately. Usually, an official death certificate and a report on the cause of death are required. In the case of death by accident, a police report may help clarify the circumstances.
The insurance company then determines entitlement, which may lead to a delayed payment in case of more than one beneficiary. If all required documents are on hand, the insurance company must pay the benefits agreed upon within four weeks (Insurance Policies Act (VVG), Art. 41) However, payout is generally made much sooner.