Insurance 101

Within 21 calendar days counted from delivery of the policy or the cooling-off notice, the policyholder may cancel in writing and recover the premium and the premium levy paid. Investment-linked policies may be subject to a market value adjustment.

The window after a premium falls due in which it can still be paid without the policy lapsing — usually about a month. Cover normally continues during the grace period; the policy terms govern.

An initial period after the policy starts during which claims arising from specified illnesses or circumstances are not covered, so that cover is not bought after the fact. Common on medical and critical illness products, and the length varies by product.

The duty on both sides to disclose material facts that would affect the underwriting decision. An omitted or misstated medical history or occupation can lead to a declined claim or a void policy.

After the policy has been in force for a stated number of years, the insurer generally cannot challenge the contract on the basis of the original disclosures, except in cases such as fraud or non-payment. The period and exceptions follow the policy terms.

The situations the policy expressly does not cover — pre-existing conditions, specified activities, a suicide clause, for example. This is usually the shortest section and the one that most needs reading line by line before applying.

The guaranteed element of the policy: the amount payable on surrender or maturity, unaffected by bonus or investment performance, and normally set out year by year in the value table.

The total payable on surrender — guaranteed cash value plus any non-guaranteed element, less charges or policy loans. In the early years this is usually well below the premiums paid.

The product of an American-style structure, also called a cash dividend. Cash is declared every year and can be withdrawn, used to pay premiums, or left with the insurer to accumulate at interest. Once declared the amount is fixed and is not clawed back, which makes it the most flexible of the three if the money may be needed early. Until declared it is still non-guaranteed.

The product of a British-style structure, also called an accrued or sum-assured bonus. It is declared every year, but what is distributed is not cash — the face amount is added permanently to the sum assured and keeps compounding, and once declared it does not change. The cash value behind it is not guaranteed: an early surrender converts it at a discount, so you usually do not recover the full amount.

Also called a special or maturity bonus, and possible on both British-style and American-style products. Nothing is paid during the year; it is settled in one go when the policy terminates — on death, surrender or maturity. The amount is revalued every year and can rise or fall. It is the bulk of long-term return on Hong Kong policies, and also the main source of volatility and drawdown.

A savings structure whose main distribution mechanism is an annual cash dividend. It is normally written as guaranteed cash value + annual dividend + terminal bonus. A declared annual dividend is not taken back, so cash flow is comparatively certain, but what can actually be drawn still follows the value table and the policy terms.

A savings structure whose main distribution mechanism is a reversionary bonus. It is normally written as guaranteed cash value + reversionary bonus + terminal bonus. The bonus compounds by increasing the sum assured rather than producing cash, and has to be converted to cash value at a discount, so early surrender values can be markedly lower.

The ratio of non-guaranteed bonuses actually paid against the amount illustrated at the time of sale. Insurers define and disclose it differently, so it has to be read together with the product structure — a single percentage cannot be read on its own.

Some participating products allow declared non-guaranteed bonuses to be locked in at a more certain value from a chosen policy anniversary, reducing later volatility. Locking in is generally irreversible.

A policy that shares in the surplus of the insurer's participating business. Benefits combine a guaranteed element with non-guaranteed bonuses, and this is the mainstream structure for long-term savings products in Hong Kong.

Whole life cover with flexible premium and sum assured, where policy value accumulates at a crediting rate declared by the insurer. Some products guarantee a minimum crediting rate. Often used with premium financing.

Policy value is linked to investment choices made by the policyholder, who bears the investment risk. A market value adjustment can apply on cancellation within the cooling-off period, so the refund may not equal the premium paid.

A government-run voluntary scheme in Hong Kong whose certified plans must meet standard terms and benefit levels and offer guaranteed renewal. It works as a baseline layer of hospital cover.

The insurer's assessment of the risk from health, age, occupation and financial information, which decides whether to accept the application and whether a premium loading or an exclusion is needed.

The sum assured up to which no medical examination is required. Above that limit, a medical report or examination is normally needed. The limit varies with age and product.

The party who holds the policy rights and is responsible for the premiums, and who may be someone other than the insured. Naming the beneficiary, surrendering and policy loans are the owner's decisions.

The insured is the person whose life or health is covered, and their age and health directly affect underwriting and premium. A contingent insured takes over if the original insured dies, so the policy does not simply end.

Some products allow the insured to be changed after the policy is in force, often used for multi-generation succession. How often it can be done, and the age conditions, follow the policy terms.

Splitting one policy into several independent policies, so the benefits can be arranged separately for different family members or purposes — leaving a separate policy for each child, for example.