Types of insurance companies
Insurance companies can be classified as
- Life insurance companies, - sell pensions, annuities and life insurance products.
- Non-life or general insurance companies - sell other types of insurance.
In most countries, life and non-life insurers are subject to different regulations, accounting and tax rules. The reason for this distinction (between the two types of in insurance companies) is that life business is long term in nature - (coverage for life assurance / pensions can cover many decades). Where as, non-life insurance cover is for shorter periods i.e. one year.
Some companies do sell both life and non life insurance and are sometimes refered to as composite insurance companies.
Insurance companies are often classified as either mutual / stock companies. This is a traditional distinction as mutual companies are becoming rare.
Reinsurance companies insure other insurance companies. This spreads their risks and protects against large losses.
There are companies reffered to as Insurance Brokers, these are like a mortgage broker, and are paid a fee by the customer to find the best insurance policy for that individual.
Life insurance and saving
As well as paying out a sum of money on death, many life insurance contracts also pay out a sum of money after a given time (in which case it is known as an endowment policy), and may also pay out a cash value if the policy is cancelled early. In many countries, such as the US and the UK, tax law provides that the interest on this cash value is not taxable under certain strict circumstances.
This leads to the use of life insurance as a tax efficient way of saving in the event of early death. Wealthy individuals can buy life insurance policies as a method of avoiding income taxes and estate taxes.
If the tax benefit exceeds the fee that is charged by the insurance company for maintaining the policy, then the policy will serve as a life insurance tax shelter. There is a lot of controversy surrounding the practice, the financial industry is divided over whether these practices work as advertised.
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