Life insurance (LI) is currently one of the most favoured mechanisms for equalising financial losses. If a person has certain financial liabilities, their discharging can be disrupted in normal circumstances only by his death. In this case insurance benefits allow business partners to proceed with the responsibilities assumed. The operation of the enterprise becomes safer, for one of the biggest contingency elements has been eliminated.

The Role of Insurance in the Economy

Insurance companies invest insurance premiums received. In macro-economic terms, such activities bring in new large investors who have a profound impact on the capital market and economy at large. It translates into wide-ranging benefits for society by generating income for investors and creating new jobs.

LI and the Family

Life insurance is important in social terms. The decease of a family member frequently entails not only a moral loss but also a financial blow for other family members. Insurance benefits allow to maintain the normal standard of living and the prospect of giving the children an education comparable to that which they would have received if they had not suffered the loss.

LI and Retirement Life insurance is very beneficial in old age when declining working capacity implies lower incomes. A drop in the level of income is not that painful if a person has endowment assurance (which provides protection only for a specified period of time) or pension insurance. In the former case, the insurance benefit received can be used to purchase some kind of property, e.g. a house, that would generate additional incomes, or to start a private business. Pensions provided by Drauda Life Insurance are to be used for direct consumption.

LI and Labour Relations

Life insurance can be looked at from a different angle, i.e. relationships between the employer and employee. Highly skilled and experienced employees are the real treasure of any company. The loss of a valuable staff member entails direct financial losses which can be alleviated by life insurance benefits. In addition to that, benefits payable at retirement and/or additional pension receipts are not only a reward but also an extra social security guarantee. Such measures are widely utilised to better a company's psychological micro-climate and to stimulate the staff to pursue common goals.

Investment Policy

Insurance companies should design their activities bearing in mind that in case of failure, they would damage the interests of a number of individuals, a prospect likely to trigger broad-based social instability. This position is reflected in investment policies pursued by insurance companies. Traditionally, investment companies compile conservative investment portfolios, have an adequate amount of available assets and employ an array of methods to optimise their risks (usually through reinsurance). Investment activity is in many cases regulated by insurance laws. For this reason the funds accumulated under life insurance are classified as a conservative, and therefore particularly safe, component of investment portfolios.

A Three-Pillar Model

Developed countries operate a three-pillar social insurance model. The central premise behind this scheme is that social security is based on three pillars:

1. Individual social provision;
2. Occupational social provision; and
3. State social provision.

When matched, the three pillars constitute a stable and viable social security mechanism. The proportions of each pillar are determined by the history of the development of a particular country. They are also affected by tax legislation.

Lithuania: Monopolies Prevail

Lithuanian laws have so far provided only for state social insurance. The tax code is not conducive in so far as insurance premiums are also taxed by social insurance contributions. This means that a person who pays insurance premiums from his earnings must pay social security contributions first. If a company contributes insurance premiums in behalf of the employee, it must pay to the State Social Insurance Fund (Sodra) anyway.

The amount of pensions payable from the said fund fall short of the level of contributions paid to the state social insurance during the lifetime. A significantly higher level of contributions to Sodra does not mean an adequate increase in pension benefits at retirement. In other words, the social security system operates on the principle of equality, providing no incentives whatsoever for bigger contributions.

Tax relief for life and pension insurance prescribed by the personal and corporate income tax laws render them more attractive. If we are to reach a level of social security comparable to that of developed countries, the insurance legislation should be improved.

Private Pension Funds

The bill on pension funds, which is currently under consideration, attaches too much importance to the first phase of pension insurance, the accumulation of funds. The payment of pension benefits by pension funds can be twofold. The amount accumulated may be paid out as a lump-sum benefit or disbursed in periodic installments until the death of the policyholder. The latter involves an additional contingency factor. To amortise it, a fairly large amount of assets is needed. The appraisal of pension liabilities is complicated and can be conducted only by a qualified insurance mathematician, an actuary. The adjournment of pension benefits that is based on erroneous forecasts may entail grave consequences, such as the pension fund's liquidation or bankruptcy.

Regrettably, the number of qualified actuaries in Lithuania is limited. Here, the experience of our northern and southern neighbours is valuable in so far as their pension funds transfer the money accumulated along with pension liabilities assumed to insurance companies that are licensed to provide pension insurance.

Drauda Life Insurance is a Worthy Choice

In choosing from among many insurance companies, one should look at:

Drauda Life Insurance is attractive in all of these respects. The company is a subsidiary of Alte Leipziger which reinsures its risks with the largest reinsurance company, Munich Re. This allow Drauda Life Insurance to learn from its long and notable experience.