In Malta, insurance companies tend to have a bad reputation that they exist only to make money for their own gain and give nothing in return. In reality, every insurance product exists to protect the customer from any risks which may materialise and compromise their financial position.
Life insurance products are crucial financial instruments that provide benefits both to the individuals buying it and also to the economy on the whole. Black and Skipper (1994) and Dickenson (n.d.) have identified these benefits which shall be underlined later on in this chapter.
Mentioning this, I decided to make my study on life insurance awareness in Malta. My decision to do so came with the intention to not only determine such awareness, but even more importantly to come up with ways of how the Maltese life insurance industry can increase it. Unfortunately, there are no official studies made by Maltese authorities in this regard, and my intention is to create solid grounds on which a larger and more accurate study can be conducted by official life insurance bodies in Malta.
1.2 Research Question
This study aims to:
Analyse the current level of awareness on life insurance among Maltese citizens from the sample of questionnaires sent
Determine the current position of the main life insurers in Malta, such as their customer profile and marketing approach to be able to make better analysis and recommendations when analysing the results obtained from Maltese citizens
Come up with recommendations on increasing awareness once the above have been analysed
Existing literature shows that there have been numerous studies conducted in Europe in this regard. The studies aimed to determine whether there are any life insurance protection gaps in an economy. The gap is the difference between the money that dependents actually have in the event of untimely death of the breadwinner and what dependents actually need so that their financial needs are met. Therefore, it is important that Malta conducts an official study in this regard to determine any life insurance gaps that may exist and deal with them accordingly.
1.3 Hypothesis
The initial expectation for this study is that there is lack of awareness on the importance of life insurance in Malta. The initial expectations are that most people who have a life insurance policy are not adequately covered and most of those who do not have a life policy do not appreciate its importance and are not willing to buy a life insurance.
The next section will provide a background to the subject of life insurance as well as the benefits it presents.
1.4 Life insurance
Life insurance is a legally binding contract between the insurer and the insured that provides the beneficiaries (depending on the type of product) with a specified death benefit upon the occurrence of the insured's death in exchange for a premium (Crews, 2009).
Life insurance can be split into 2 main products, namely protection policies and investment policies. Protection policies provide cover against a specified event, for example upon the death of the policyholder the life insurer will pay the remaining amount on a mortgage. A typical protection policy is term insurance. On the other hand, investment policies are designed to help the policyholder accumulate capital over time by paying regular or single premiums. Typical policies are the with-profits and unit-linked policies.
1.4.1 - Parties to a contract
Life insurance can be bought by someone who can be different than the life insured. The policy owner can buy coverage to protect against his own life. In that case, the owner is also the life insured. But there may be circumstances where the insured life may be different than that of the policyholder. This means that a husband can issue a policy covering his wife's life. There can also be minors insured as long as the owner is an adult and is competent and has the capacity to enter into a legal contract (Mishra 2010).
1.4.2 - Main types of life insurance products
The main types of life insurance products can be split into term assurance, whole of life and endowment assurance. Sethi and Bhatia (2007) point out the details of such policies.
There are also some products with the intention to provide investment gains apart from protection, and these are the with-profits policy and the unit-linked policy (Malta Insurance Association [MIA], n.d.).
Term assurance is a life insurance contract that will exist for a specified period of time and will only pay out if the life insured dies in the term of the policy. If the policy holder does not die within that term, there will be no payment made and the contract will simply expire. There are various categories of term assurance such as decreasing term and level term (Sethi and Bhatia, 2007).
The other form of life insurance is whole of life. This differs from term assurance in that it does not expire. The claim is triggered whenever the policyholder dies. Due to the fact that a claim is certain, this is a more expensive policy than the term assurance. There are also various categories of whole life mainly the single premium whole life, regular premium whole life, with-profits whole life and non-profit whole life (Sethi and Bhatia, 2007).
Endowment policies provide a lump sum payment when the life assured reaches a specified age but also pay if the life assured dies before reaching that age. 'This policy not only makes provisions for the family of the life assured in event of his early death but also assures a lump sum at a desired age' (Sethi and Bhatia, 2007, p. 185). The main categories of endowment policies are with profits and non-profit endowments.
On the other hand, there are investment type policies that provide not only protection elements, but also investment opportunities for the policyholder. Two of the main types of such policies are the with-profits and the unit-linked policies.
In a with-profits policy, the premium paid by policyholders is put in a pool of funds and is invested in a large array of stocks, bonds and government property. Although not guaranteed, the policy may pay a regular bonus as well as a terminal bonus when the policy reaches its maturity age. In this case, the policyholder will get back at least the amounts invested in the policy account (MIA, n.d.).
On the other hand, there are unit-linked policies. A major difference here is that payback of the full premium invested is not guaranteed. In unit-linked policies, investments are more risky and the policyholder chooses where to invest them, unlike with-profits policy. There is, however, more potential to earn because of the higher risk involved. There is little protection elements as the intention of this policy is to offer investment opportunities (MIA, n.d.).
After having introduced life insurance, the next section will cover the benefits of life insurance to the individual as well as to the economy.
1.5 - The benefits of life insurance to the economy and to the individual
The following section will explain why it is so important to raise life insurance awareness in Malta.
Life insurance is an important instrument for both the economy and the individual who buys it. Life insurance companies invest in a large array of investments in an economy to build up reserves to pay for claims in the future. Consequently, investments made by life insurance companies are important sources of funds to the economy as they make large contributions towards the capital markets (Black and Skipper, 1994).
Life insurance also provides wide benefits to the individual buying it. The most important benefit is that life insurance promotes peace of mind. Also, another benefit is that it gives other means through which individuals can save and that it gives ways of making financial arrangements to provide for retirement income (OECD secretariat, n.d.).
1.5.1 - The benefits of life insurance to the economy
The contribution of life insurance companies has grown, making them very important institutions for the economy. Dickenson (n.d.) has identified economic benefits such as mobilisation of saving, contributing towards the development of capital markets and assisting in the reform of the pension systems.
1.5.1.1 - Savings function
Life insurance is a huge contributor to the savings function in an economy. Individuals buying life insurance pay small amounts to buy savings contracts. These are then pooled into large accumulated funds, and with these funds life insurance companies are able to invest in larger and more risky investments. In the long run, life insurance increases long term saving in the economy. These long term savings can also be made available to the private sector by issuing debt and equity capital (Dickinson, n.d.).
Black and Skipper (1994) also support such an argument by pointing out that small amounts from policyholders can be pooled up to make large funds that can be invested in the public and private sectors.
1.5.1.2 - Social welfare alternatives
Life insurance can reduce the dependency on the state by reducing the burden of pensions payable to the retired. Governments are being faced with an increasing ageing population, making it difficult to fund for these as the working population to the retired population ratio is falling. Due to this, governments are encouraging people to shift to life insurers as these provide private pension schemes. This can be taken individually or else in a group pension scheme, such as the ones offered by employers or professional associations (Dickinson, n.d.).
Black and Skipper (1994) also support this argument that life insurance decreases dependency on the state when it comes to pension provisions. 'Life insurance can reduce the financial burden on the State [government] of caring for the aged' (Black and Skipper, 1994, p.46).
1.5.1.3 - Contributing towards the development of the capital market
Life insurance companies invest premiums in the capital market. The transmission of saving is passed into the economy via the investments made by life insurance companies in the capital markets. Life insurance companies also have the role of underwriting new equity and bond issues in the capital markets and therefore have a risk absorption role. This will further help in the issuing of new equity and debt securities in the capital market (Dickson, n.d.). According to Black and Skipper (1994, p.36):
The investment function is a significant factor in a company's competitive position. This investment activity establishes the life insurance business as a significant factor in the capital markets.
1.5.2 - The benefits of life insurance to the individual
Life insurance is also an important instrument because it offers a wide range of benefits to the individual buying it. Black and Skipper (1994) have underlined some of these benefits.
Assisting in saving - Life insurance is a good way of accumulating savings and wealth. Small premiums are invested regularly to build up the policy account of the individual. If the policy owner suffers premature death, the life insurance policy guarantees the full face value from the beginning and therefore there will still be enough compensation given to dependents. This will encourage thrift as people will have to pay regular premiums to continue the life insurance policy, and this can be a way of semi-compulsory saving (Black and Skipper, 1994).
Increase initiative by lessening worry - If policyholders know that their dependents will be covered by the life insurance policy, it will reduce their worry. This may in return increase efficiency and will make individuals take more initiatives (Black and Skipper, 1994).
Provide extended income for the elderly - elderly people are primarily worried of outliving their savings accumulated throughout the years. Life insurance can hedge against this risk by providing an annuity contract that keeps paying regular annual payment until the policy owner dies (Black and Skipper, 1994).
1.6 - Conclusion
This chapter has underlined the rationale and the research questions behind this study, namely that it aims to analyse the current level of life insurance awareness among Maltese citizens and also to determine the current position of the main Maltese life insurers. It has also provided a background on life insurance, such as the main types of policies, and finally it has underlined those benefits that life insurance brings to the individuals as well as to the whole economy. The next chapter shall look at the literature review.
