Understanding Life Insurance

Why we have created this Information Corner

At different stages of life, your insurance needs may change.

Before taking out a policy, a sensible first step is to become familiar with the essentials of life insurance, identify your objectives, and evaluate your protection needs and financial situation, so that you can choose one that best suits your needs.

This Information Corner is designed to help you:

  • ● Explore the main types of life insurance
  • ● Gain clear and accessible knowledge
  • ● Be well equipped to make informed decisions about your cover

Types of life insurance

A. Term Life Insurance

Term life insurance is a purely protective product. If the insured person passes away during the coverage period, the beneficiary will receive a lump-sum death benefit. It does not comprise any savings or investment elements, so there is no accumulated cash value upon policy termination. In general, for the same premium, the payout for a term life insurance policy is higher than that of other types of life insurance.

Features
Coverage period Fixed term or until a specified age
Death benefits It is normally a fixed amount, but some policies may offer an amount which varies over the policy term.
Premium payment ▶ The premium remains the same over the term, but may increase with age upon renewal.
▶ Generally, it can be paid annually, monthly, quarterly or half-yearly.
Who should consider it? ▶ Young people with limited financial means.
▶ Individuals who have high protection needs (e.g. mortgage loan repayment) for a certain period of time.
▶ Individuals who are looking solely for protection and have other financial plans.

Reminders

  1. Choose a coverage period that suits your needs:Term life insurance is designed to strengthen the protection of the insured person for a specific period. Consider your protection needs for a specific period, such as how long it will take to pay off your mortgage and when you expect your children to start working.
  2. Consider your insurance portfolio as a whole:Term life insurance can be either a standalone policy or a rider on your existing policy. You can flexibly adjust the total sum insured by adding an appropriate amount of term life insurance.
  3. Make sure you understand “guaranteed renewal”:The coverage period varies for different products, but in general, it is guaranteed renewable, which means the insurer guarantees policy renewal up to a specified age, regardless of the health condition of the insured person. However, “guaranteed renewal” does not mean there will be no changes in any of the policy terms. Insurers may adjust the premium level according to your age, the inflation rate or other factors.
  4. Learn more about convertibility:Some policies allow you to convert your existing term life policy to a whole life insurance policy. For such conversions, policyholders are only required to pay the corresponding premium for the new policy, without the need to submit another health record. You may consider a conversion depending on your long-term insurance needs.
CLIO product example: “SecureYou Term Life Plan” - This plan provides life protection with flexible choices of coverage period. It is particularly suitable for customers who require a higher level of protection during a specific term of years.

B. Whole Life Insurance

Whole life insurance offers mortality protection for the lifetime of the insured person. If the insured person passes away, the beneficiary will receive a lump-sum death benefit. It has savings elements and provides a cash value upon policy surrender. Some products are participating policies, which allow policyholders to receive non-guaranteed dividends or bonuses distributed from the insurer.

Features
Coverage period Lifetime
Death benefits The total amount as shown in the benefit illustrations. It normally comprises bonuses or dividends of the policy (if any) at the time of death.
Premium payment ▶ It can generally be paid in a single premium or by instalments.
▶ Instalments can generally be paid annually, monthly, quarterly or half-yearly.
▶ The premium normally remains unchanged over the term of the policy.
Who should consider it? Individuals in a strong financial situation who want both protection and long-term savings.

Reminders

  1. Understand that buying whole life insurance is a long-term financial commitment:Whole life insurance has a lifetime policy term. It takes a long time to accumulate the cash value, which means it requires a long-term financial commitment from the policyholder. Given the product structure, early surrender of the policy will result in a significant financial loss, with policyholders getting far less than they paid. Assess your long-term protection needs and affordability prudently before taking out a whole life insurance policy.
  2. Pay attention to the non-guaranteed part in the cash value of the participating policy:Non-guaranteed dividends or bonuses are payments distributed to policyholders generated from the investment returns of insurers after deducting operating costs and profits, and are affected by the insurers’ investment strategy and performance, claim experience, operational expenses, etc. The final payout may be higher or lower than the projected payout illustrated in the benefit illustration. For the actual non-guaranteed dividends or bonuses distributed for specific insurance products, refer to the fulfillment ratios published by the insurers. Refer to the Understanding a Participating Policy webpage on the Insurance Authority website to learn more about how to choose a participating policy and points to note when interpreting fulfilment ratio and benefits illustrations.
  3. Adjust your insurance portfolio according to your personal protection needs:Whole life insurance can provide continuous protection for policyholders. However, if you are going to increase the sum insured significantly during a specified period, consider how to couple the product features of your whole life insurance with that of your term life insurance. Make use of their different product features to adjust your insurance portfolio to suit your protection needs.
CLIO product example: “Promise Family Protector” – This whole-life insurance plan offers lifelong protection and the opportunity to accumulate cash value. It combines security with wealth-passing benefits, making it suitable for customers who wish to protect their loved ones while planning for legacy.

C. Endowment Insurance

If the policy term ends or the insured person passes away, the insurer will pay a lump sum to the policyholder or the beneficiary. It has a savings element and provides a cash value upon policy surrender. Some products are participating policies, which allow policyholders to receive non-guaranteed dividends or bonuses from the insurer. The savings element in endowment insurance is greater than that in whole life insurance.

Features
Coverage period Fixed term
Death benefits The total amount as shown in the benefit illustrations. It normally comprises bonuses or dividends of the policy (if any) at the time of death.
Premium payment ▶ It can generally be paid in a single premium or by instalments.
▶ Instalments can generally be paid annually, monthly, quarterly or half-yearly.
▶ The premium normally remains unchanged over the term of the policy.
Who should consider it? Individuals with specific savings goals, such as planning for their children’s education.

Reminders

  1. Be aware of the relatively weak life protection:Although endowment insurance comprises both savings and life protection, its savings function is usually the main feature, so the life protection part is relatively weak. For some short-term endowments in the market, the death benefits are only slightly higher than the premium paid. The life protection function of these products is very limited. Consider your objectives, and evaluate your needs regarding savings and life protection before taking out an endowment policy.
  2. Choose a coverage period that suits your needs:Given the product structure, early surrender of the policy will result in a significant financial loss, with policyholders getting far less than they paid. Assess your savings goals and duration, and then choose the coverage period that best suits your needs.
  3. Pay attention to the non-guaranteed part in the cash value of the participating policy:Non-guaranteed dividends or bonuses are payments distributed to policyholders generated from the investment returns of insurers after operating costs and profits are deducted, and are affected by the insurers’ investment strategy and performance, claim experience, operational expenses, etc. The final payout may be higher or lower than the projected payout illustrated in the benefit illustration. For the actual non-guaranteed dividends or bonuses distributed for a specific insurance product, refer to the fulfillment ratios published by the insurers. Refer to the Understanding a Participating Policy webpage on the Insurance Authority website to learn more about how to choose a participating policy and points to note when interpreting fulfilment ratio and benefits illustrations.
CLIO product example: “Wise Legend Multi-Currency Insurance Plan” – This endowment insurance plan provides potential bonuses together with flexible payout options. It is particularly suitable for customers with long-term savings needs.

D. Investment-Linked Assurance Scheme (ILAS)

An ILAS bundle life insurance and investment options. If the insured person passes away during the policy term, the insurer will pay a lump sum to the beneficiary. In the meantime, the policy will accumulate account value. The account value of the policy varies with the investment performance of the funds or assets selected by the policyholder. If the investment performance is poor, the account value of the policy may decrease or even be lower than the total premiums paid.

Features
Coverage period Fixed term or lifetime
Death benefits The amount of the death benefit is affected by the account value at the time of death; there is a minimum protection level, as stipulated in the guideline# issued by the Insurance Authority.
Premium payment ▶ It can generally be paid in a single premium or by instalments.
▶ Instalments can generally be paid annually, monthly, quarterly or half-yearly.
▶ The premium normally remains unchanged over the term of the policy.
▶ Some policies allow policyholders to apply for premium holidays. However, the fees and charges are still applicable during the premium holiday and are deducted from the account value.
Who should consider it? Individuals who are investment savvy and want to invest while requiring minimal mortality protection.

#Guideline on Underwriting Class C Business (GL 15).

Reminders

  1. Be aware of the limited life protection:Most ILAS policies provide limited life protection. The death benefit only slightly exceeds the account value of the policy, and this value is affected by the performance of the selected investment portfolio. If the investment performance is poor, the account value of the policy may decrease and affect the death benefit. If a certain amount has been withdrawn from the policy during the coverage period, the death benefit will be reduced accordingly.
  2. Pay attention to the high risk investment:The account value and the death benefits of an ILAS varies with the performance of the selected investment portfolio. If the investment performance is poor, the account value may decrease or even be lower than the total premiums paid. In some extreme cases, the account value may drop to zero. Remember to evaluate your risk-tolerance level before choosing an investment option
  3. Check the fees and charges:An ILAS involves different fees and charges, such as the cost of insurance, surrender charges, administrative charges, charges for switching investment options and fund management fees. The fees and charges are deducted from the account value, which will affect the final amount of the surrender value or death benefit received by the policyholders or their beneficiaries.
  4. Check the funds when choosing investment options:To protect your interests, check whether the fund is authorized by the Securities and Futures Commission (SFC) when choosing an investment option; ensure that you fully understand the fund’s features, risks, fees and charges, and the background of the fund company; and regularly monitor the fund’s investment performance.
Currently, there are no related products available for sale.

E. Universal Life Insurance

Universal life insurance has a savings element, which can accumulate the account value. If the insured person passes away, the insurer will pay a lump sum to the beneficiary. There is flexibility in terms of premium payments and withdrawals of account value. Policyholders are normally allowed to adjust the premium amount and withdraw the account value according to the policy terms. They can also use the interest earned to pay premiums. The account value increases with interest distributed by insurers and decreases with deductions for the cost of insurance and other charges. Insurers distribute non-guaranteed interest according to a regularly declared crediting interest rate. Some policies have a minimum guaranteed crediting interest rate.

Features
Coverage period Generally lifetime, but flexible, depending on the policy terms.
Death benefits The sum insured or the account value at the time of death, whichever is higher; or a specified percentage that is higher than the account value at the time of death.
Premium payment ▶ It can generally be paid in a single premium or by instalments.
▶ Instalments can generally be paid annually, monthly, quarterly or half-yearly.
▶ Policyholders may increase the premium amount according to the policy terms during the coverage period.
▶ Some policies allow policyholders to apply for premium holidays. However, the fees and charges are still applicable during the holiday and are deducted from the account value.
Who should consider it? ▶ Individuals in a strong financial situation, who have a basic knowledge of insurance and financial management.
▶ Individuals who may need to partially withdraw the account value in the future to meet liquidity needs.

Reminders

  1. Pay attention to the crediting interest rate:Most universal life insurance in Hong Kong regards the interest rates announced by insurers as expected returns. Pay attention to the various factors that may affect the rate, which may result in an unexpected outcome.
  2. Note that life protection is affected by the account value:Policyholders are allowed to withdraw the account value of the policy during the coverage period to meet their liquidity needs, but the death benefit will be reduced accordingly.
  3. Review your protection needs and account value regularly:The flexibility of universal life insurance allows policyholders to adjust the sum insured and premium level. To make use of this feature, regularly review your protection needs and the account value of your policy, and make adjustments if necessary.
  4. Check the fees and charges:Universal life insurance involves different fees and charges, such as the cost of insurance, administrative charges and surrender charges. The fees and charges are deducted from the account value, which may affect the final amount of the surrender value or death benefit received by the policyholders or their beneficiaries.
Currently, there are no related products available for sale.

Common types of life insurance products at a glance

Term life insurance Whole life insurance Endowment insurance Investment-linked assurance scheme (ILAS) Universal life insurance
Key features Pure life protection product with no accumulated cash value Provision of lifetime protection and accumulation of cash value, which can be withdrawn upon policy surrender Provision of a savings element and accumulation of cash value, which can be withdrawn upon policy surrender Bundling of life insurance and investment options; variation of account value, depending on investment performance Provision of a savings element and flexibility in terms of premium payment and withdrawal of account value
Coverage period Fixed term or until a specified age Lifetime Fixed term Fixed term or lifetime Generally lifetime, but flexible, depending on the policy terms
Death benefits Normally a fixed amount equal to the sum insured. Some policies may offer an amount which varies over the policy term The total amount as shown in the benefit illustrations. It normally comprises bonuses or dividends of the policy (if any) at the time of death The total amount as shown in the benefit illustrations. It normally comprises bonuses or dividends of the policy (if any) at the time of death Depends on the account value, which is affected by the investment performance up to the time of death. There is a minimum protection level, as stipulated in the guideline# issued by the IA The sum insured or the account value at the time of death, whichever is higher; or a specified percentage that is higher than the account value at the time of death
Who should consider it? Young people with limited financial means; individuals who have high protection needs for a period of time or who are looking solely for protection and have other financial plans Individuals in a strong financial situation who want both protection and long-term savings Individuals with specific savings goals Individuals who are investment savvy and want to invest, while requiring minimal mortality protection Individuals in a strong financial situation who have a basic knowledge of insurance and financial management; or those who may need to partially withdraw the account value in the future to meet liquidity needs

#Guideline on Underwriting Class C Business (GL 15).

Source Statement

The information on this page includes references to publicly available materials from the Insurance Authority of Hong Kong and product examples from China Life (Overseas). All examples are for reference only. Please refer to the latest brochures for details of products currently available for sale.