How Life Insurance schemes meet the saving needs
How Life Insurance schemes meet the saving needs?
The purchase of life insurance leads itself to a regular, consistent savings plan. The plan fits the psychological needs of many savers for a regular savings plan with a semi compulsory flavour. As premium become due they are looked upon as any other bill and are more or less automatically paid.
Annuity contracts arc also used as means of savings. A life annuity is the reverse of the life insurance. It is often said that whole life insurance is insurance ‘against dying too soon” and the annuity is insurance against “living too long”. As one can not know how long he will live after retirement, it has become an useful practice for many people to buy annuity. Under the annuity an insured receives a certain smaller income in return for an uncertain but larger income. When a person buys an annuity, he is agreeing that a portion of this estate shall be used for those
who live long in return for the promise that if he should be one of the fortunate
one to live long, he will receive contributions from those who die early.
The usefulness of life insurance and annuity contracts as means of savings has been criticised by many as there arc other superior methods of savings. One of the major criticisms has been that the inflation experienced in the economy eats away the value of those savings more quickly. It is rightly argued that over a period of time an average price level rises faster than the average income level and that the purchasing power of accumulated savings is thereby lessened.
In order to combat this problem, it has been proposed by some experts that a life insurance policy be issued with an automatic annual increase in the face amount and cash values to reflect an assumed annual rate of deterioration in the purchasing power of the money. However, such an insurance is not ordinarily available and not offered by the private insurers Another alternative method to deal with the problem has been through “variable annuity”. This method provides fund for a retirement income which would have a variable money value but a Constant purchasing power. The operation of variable annuity method may be described in brief. Under this method a person should accumulate funds in equities and securities in the account of the insurer. The basic idea is that if the general price level rises over the accumulation period, the value of savings will arise, thus maintaining their purchasing power at a fairly constant level. If the general price level falls, the value of the saving will also fall, but their purchasing power will still remain constant. It is assumed that the value of the stocks at the end of a certain period would remain nearly perfectly adjusted to the rise in the consumer pride index. The insurer would express the accumulated fund in units of any arbitrary amount say taka 10,100 etc.
For example, the stock value of taka 40,000 would be expressed as 400 units to taka 100 each. However, the value of each unit is recalculated every year to reflect changes in the value of underlying securities and the annuitant would be paid in term of their unit values.
The main defect of this system is that it assumes that the stock market is nearly perfect reflection of consumer price changes which may not be true in all circumstances. In fact the stock market is a imperfect instrument in measuring changes in purchasing power. There will be some period when the value of the annuity may bear no resemblances to actual changes in prices. There exists a risk that if the annuitant retires at the time of a severe stock slump, he may not realise enough on retirement and thus suffer loss of substantial principal. Moreover, there is no guarantee that insurers who offer variable annuities will be able to achieve satisfactory Investment results even in times when the general stock market index
The variable annuity albeit a radical departure from traditional life of Insurance contemplated so far, it is not an all cure method. However, it holds sufficient promise to warrant careful investigation and experimentation In this context we will examine later the Islamic alternative of savings plan on Mudarabah basis.