Ch 6: Life insurance products Flashcards
List 15 life insurance products
- Term assurance (level)
- Term assurance (decreasing)
- Term assurance (renewable)
- Term assurance (convertible)
- Endowment assurance
- Pure endowment
- Whole life assurance
- Critical illness
- Long-term care
- Income protection
- Immediate annuities
- Deferred annuities
- Income drawdown
- Investment bond
- Keyperson cover
how are profits calculated for life Insurance contracts?
Premiums net of reinsurance premiums paid
+ Investment income and gains
- Claims (e.g. death, sickness, maturity, withdrawal) net of reinsurance recoveries
- Expenses and commission
- Increase in provisions (reserves)
- Increase in the cost of capital
- Tax
= Profit
Assumptions needed in Life Insurance
Assumptions needed include: ·
* premium rates per policy
* sales volumes and mix of business
* investment returns, e.g. bond yields, dividend yields and growth
* expense levels
* expense inflation
* commission rates
* mortality rates
* morbidity rates
* withdrawal rates
* separate assumptions to calculate the provisions (these assumptions may be more prudent than those used above), for example, a valuation interest rate, valuation mortality rates
* solvency capital requirements
* tax rates
* reinsurance premium rates and recovery rates.
Key Life Insurance Contract risks
- mortality (too many deaths), longevity (living too long) and morbidity (sickness)
- investment risks, e.g. poor or volatile returns, falls in asset values, default risk
- expenses, not met by premium loadings or charges
- early withdrawals, before the initial expenses have been recovered
- new business volumes too high and hence new business strain, or too low and not enough business over which to spread the overheads
- credit risk, i.e. failure of a counterparty such as a reinsurer or a broker
- operational risks, e.g. fraud, systems failure, regulatory changes.
Pure endowment/ Endowment assurance
- Pure Endowment provides a benefit on survival to a known date and hence operates as a savings vehicle
- Endowment assurance also provides significant benefit on the death of the life insured, operates as a vehicle of dependent protection.
Whole life assurance
Provides a benefit on the death of the life insured whenever that might occur.
Term assurance
Provides a benefit on the death of the life assured provided it occurs within the term selected at outset.
Normally don’t have any benefit paid on withdrawal.
Give examples of customer needs met by a group version of a term assurance product
- An employer could take out a group TA contract on its employees to provide a death in service benefit, which pays out if an employee dies.
- A credit card company can take out a group TA contract on its credit card holders to pay off any balance outstanding on the death of the cardholder
- A supplier of goods with payments in installments could take out a group TA on its payees to cover the difference between the amount owing and the value of the recovered goods upon the death of the payee
Convertible/renewable term assurance
Combine a term assurance with the certainty of being able either to convert to a permanent form of contract (ie an endowment or whole life assurance) or to renew the original contract for a further period, all without further evidence of health being provided.
Immediate annuity
Involves a single premium purchasing an income stream, which commences immediately after purchase.
limited period are called temporary annuities
Deferred annuity
Can be used when there is the time between the date of purchase and the date when the income is required to start.
The contract can be paid for either by a single premium or by regular premiums during the deferred period.
Income drawdown
Allows an individual to leave their accumulated fund invested and draw an income from it annually.
May be limits on how much can be drawn each year and an age limit at which point an annuity must be purchased.
Investment Bond or investment-linked insurance policy
“These are single premium contracts, normally whole life, designed to enable policyholders to invest for the medium to long term.
- can usually make withdrawals
- may incur a penalty in the first few years
- restrictions on the frequency with which withdrawals
- On death, the bond will pay a lump sum.
- may be a guarantee
- unit-linked or investment-linked basis”
Income protection
Enables individuals to provide an income for themselves and their dependents during the period of long-term sickness or incapacity due to accident or illness.
Typically terminate at retirement age.
Critical illness
Provides a cash sum on the diagnosis of a “critical” illness as defined by the policy documents.