Which policy pays a death benefit only upon the death of the last person insured?

Life insurance typically provides a cash sum on the death of an individual (i.e. the insured person) or on him/her becoming incapacitated in consequence of an injury or sickness. Some of the major types of life insurance are summarized as follows:

Term Life

A "Term Life" policy pays a lump sum (also called "death benefit") only upon the death of the policyholder/the insured person. It does not provide any dividends or savings, but pure protection against death. Term policies are of a fixed duration, for example 10 or 20 years. If no claim is made, the policy will expire at the end of the term.

Whole Life

A "Whole Life" policy pays a lump sum upon the death of the policyholder/the insured person or at the termination of the policy. It usually covers a longer and unfixed duration (usually up to age of 100 of the policyholder/the insured person) as long as the premiums are paid. Premiums for a whole life policy are usually fixed based on the age of the insured person when the policy is issued and they do not increase as time passes. Unlike a term life policy which may expire without paying out, a whole life policy would always pay out eventually. Hence, the premiums for a whole life policy are typically much higher than those of a term life policy.  Some whole life polices (known as “participating policies” or “with-profits policies”) provide dividends to policyholders, for the insurance company will share its excess profits with the policyholders. Premiums for such participating policies are typically higher than those of non-participating policies

Endowment

An "Endowment" policy pays out a lump sum after a specific term (usually 5, 10 or 20 years) or if earlier, upon the death of the policy holder / the insured person. It is designed to provide the policyholder savings for future living, as well as a life insurance protection.

Annuity

An annuity is typically used for retirement planning which helps policyholders accumulate savings for getting a steady income after retirement or over a long term in future. A policyholder pays premiums to an insurance company, who in turn provides the policyholder with a regular payment for a period specified in the contract after a designated period of time or when the policyholder reaches a certain age.

Qualifying Deferred Annuity Policy

A deferred annuity is one type of annuities. The policyholder pays premiums regularly over a period of time (i.e. the accumulation phase), in return he will receive regular income for a period of time in future (i.e. the annuitization phase).

To promote voluntary retirement savings, the Government of Hong Kong in 2019 introduced tax reliefs in respect to certain deferred annuities that are certified by the Insurance Authority as Qualifying Deferred Annuity Policies (QDAP). The policyholder (as taxpayer) of a QDAP can claim for potential tax deductions on premiums paid up to HKD60,000 per tax assessment year.

Investment-linked assurance schemes

An investment-linked assurance scheme (ILAS) is a life insurance policy issued by an insurance company which provides the policyholder with life insurance cover plus investment options (usually funds).  Its policy value is determined by reference to the performance of the “underlying or reference funds”. While the policyholders have the ownership of the life insurance policy, the underlying assets (normally the underlying or reference funds) are owned by the insurance company.

Mandatory Providential Fund Schemes (“MPF”)

Following the implementation of the MPF (an employment-based retirement protection system) on 1 December 2000 , both employers and employees should know more about their rights and obligations relating to MPF schemes.

For more information regarding MPF matters, please visit the website of the Mandatory Provident Fund Schemes Authority.

Whole life insurance (also referred to as permanent life insurance) refers to life insurance policies that are meant to last until death and have an investment aspect. As long as the person pays the required premiums, the insurance policy will provide a death benefit when the person dies in contrast with term life insurance which only covers a specific amount of years. The premiums for a whole life insurance policy go towards the guaranteed death benefit and an investment account. The investment part of the premiums can build value overtime with many policies including a guaranteed return rate. The policy holder can take money from the cash value of the investment account during their lifetime, but this can reduce the death benefit for the beneficiaries. Also, the policyholder may be able to take a loan against the policy, or ‘surrender’ the policy for its entire cash value minus any obligations, which ends the policy coverage. Depending on the terms of the policy, the cash value of the policy may either go to the beneficiaries or the insurance company when the policy holder dies. Whole life insurance, given its lifelong death benefit guarantee, can be expensive compared to other policies.

There are important tax considerations for whole life insurance policies. The investment part of the policy builds value tax-free until withdrawal like retirement accounts, and similarly, any value that is withdrawn greater than that paid into the policy will be taxed. Individuals may exchange their current policy for another or for qualified investment alternatives, but they must follow specific tax guidelines to avoid being taxed in between the exchange.

[Last updated in April of 2022 by the Wex Definitions Team]

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