Life Insurance Blog

Life insurance and pensions are closely linked subjects and it’s a good idea to understand this even if one seems like an insurance policy and the other seems like a savings policy.

Life insurance and pensions are both linked to the life expectancy of the purchaser, and that’s why they are generally offered by the same providers. Both life insurance and pensions use actuaries, who try to categorise the purchaser into the most appropriate group.

Groups are actually very important for pricing and managing both life insurance and pensions, in some ways more important than the actual risk of the purchaser dying within that term (at least to the insurance company). Essentially both life insurance and pensions are calculated on the fact that, although it’s almost impossible to predict what will happen to an individual during a certain period of time, such predictions become easy and accurate when spread over the whole group. Statistics show that, within such a group, a certain percentage of individuals will die, another percentage will become disabled or otherwise unable to work, and so on. Managing the group simply becomes a matter of collecting premiums and making payouts. Prediction for an individual becomes administration for a group.

This means both life insurance and pensions are cheaper when offered as part of a stable group, such as a workplace or a professional association, as the employer or association has good records which can be used to calculate life expectancy for the members over the next few years.

Life insurance and pensions each contain elements of both savings and insurance. Life insurance offers saving across a group, although the payouts are distributed less evenly to the beneficiaries of those who die within that period. The early part of a pension is an investment but the second half is an insurance product, where the annuity provider in essence offers a reverse life insurance policy. The purchaser makes the payout at the beginning of the term but then is repaid through premiums later in life.

There are some tax advantages to arranging life insurance policies through superannuation funds, as the premiums can be paid net of tax and credited gross of tax. Although this can provide substantial savings, there are also administrative differences. There can be a delay getting the payout to the beneficiaries and there can be limited choices in the life insurance offered through the superannuation account.