3 - Life insurance products (3) Flashcards
What is an immediate annuity?
An immediate annuity is a contract to pay out regular amounts of benefit provided the life insured is alive at the time of payment
What does ‘immediate’ indicate in an immediate annuity?
‘Immediate’ indicates that the contract starts payments immediately, without a deferred period
How are payments made in an immediate annuity?
Payments may be made in advance or in arrears
What is the main purpose of purchasing an immediate annuity for consumers?
To convert capital into lifetime income and remove uncertainty of how quickly capital should be spent
What is a compulsory purchase annuity?
An annuity that must be purchased from part or all of a pension fund accumulated to the retirement date
What is a last survivor annuity?
An annuity that provides for dependants’ income following the death of the main life
What are the common types of payments in immediate annuities?
Payments may be level or variable, with variable payments commonly being fixed or inflation-linked increases
What is a guaranteed minimum payment term in an annuity?
A guarantee that, on death within a specified period, any shortfall between the initial premium paid and the amounts of annuity received will become payable
True or False: Immediate annuities can be purchased on both single life and joint life bases.
True
What is the main risk associated with immediate annuity contracts?
Longevity risk, particularly regarding understating the rate of improvement of life expectancy
What is anti-selection risk in the context of annuities?
The risk that those most likely to buy an annuity are individuals in reasonably good health or with a family history of longevity
Fill in the blank: The nature of the investment risk in annuities depends on the extent to which the annuity payments have been matched by _______.
[suitable assets]
What is expense risk in immediate annuities?
The risk that the reserve for future expenses will prove inadequate due to inflation or inefficiency
inefficiency:causing fixed costs to rise as a proportion of the in force business
How can an insurance company permit benefits to be paid on the withdrawal of an annuity?
By ascertaining evidence of good health at the time of withdrawal, subject to medical underwriting
What is capital strain in the context of immediate annuities?
The situation where the insurance company is required to set up reserves and solvency capital larger than the single premium
What is a deferred annuity?
A contract to pay out regular amounts of benefit provided the life insured is alive at the end of a deferred period when payments commence, and subsequently alive at the future times of payment.
What flexibility may a person prefer regarding deferred annuity premiums?
The option to take out a new single premium policy each year until the chosen retirement age
True or False: Surrender values are normally available post vesting in a deferred annuity.
False
What is the vesting date in the context of deferred annuities?
The date when payments commence.
What types of premiums may be payable up to the vesting date?
- Regular premiums
- Single premiums
When is a single premium typically payable in an individual contract?
Once, at the beginning of the contract.
What is a potential advantage of taking out a new single premium policy each year?
Flexibility in premium payments.
Are surrender values usually available post vesting?
No, they are not normally available post vesting.
During which period may surrender values be payable?
During the deferred period.
What may legislation require regarding the surrender value of a deferred annuity?
It must be reinvested in a pension arrangement.
What are the two types of deferred annuities?
- Without-profits
- With-profits
What does a with-profits deferred annuity provide?
A guaranteed level of regular income and bonus additions.
What option may be offered at the vesting date of an annuity?
A lump sum in lieu of part or all of the pension.
What combination can achieve similar aims to a deferred annuity?
Combining an endowment assurance with an immediate annuity.
What are two disadvantages of the endowment + immediate annuity structure?
- Uncertainty in income conversion rates
- Higher expenses (commission)
What risks are associated with an endowment assurance?
- Investment returns
- Mortality
- Withdrawals
- Expenses
What happens if a guaranteed conversion rate exceeds the normal rate offered?
The company may provide a higher benefit than it can afford.
What are the risks involved when a deferred annuity has a guaranteed rate for converting income to a lump sum?
Increased investment, mortality, and expense risks.
What are the risks of providing guaranteed conversion rates at the vesting date?
This would make the terms on offer over-generous, and costly to the company. This might arise if:
* future annuitant mortality were heavier than assumed in the conversion terms, or
* current interest rates were higher than assumed in the conversion terms, or
* future expenses were lower than assumed in the conversion terms.
What is the risk to the insurance company regarding the conversion guarantee?
The cost of buying an annuity may be lower than the guaranteed conversion value.
What additional capital may be required for a deferred annuity?
Capital to cover guaranteed terms for converting between lump sum and pension.
What principle is similar to the capital requirements for a deferred annuity?
The extra capital required for a guaranteed renewal option under renewable term assurance.
