6 - Life insurance products

Question 1

Give examples of customer needs met by a group version of a term assurance product

Answer 1

1. 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.
2. 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
3. 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

Question 2

Under what circumstances are benefits paid under:

1. A critical illness contract
2. An income protection contract
3. A long-term care contract

Answer 2

1. Critical illness - On diagnosis of a critical illness as set out in the policy documentation
2. Income protection - During periods of incapacity due to accident or illness
3. Long term care - When the insured needs home or nursing home care

Question 3

List 15 life insurance products

Answer 3

1. Term assurance (level)
2. Term assurance (decreasing)
3. Term assurance (renewable)
4. Term assurance (convertible)
5. Endowment assurance
6. Pure endowment
7. Whole life assurance
8. Critical illness
9. Long-term care
10. Income protection
11. Immediate annuities
12. Deferred annuities
13. Income drawdown
14. Investment bond
15. Keyperson cover

Question 4

List the 4 main investment types for life insurance contracts

Answer 4

1. Without profit
2. With-profit
3. Unit linked
4. Index-linked

Question 5

Without profit

Answer 5

Benefits are fixed at outset.

The insurer bears the risk of experience not being as expected but also receives the profits.

Typically used for protection products but also for savings.

Question 6

With profit

Answer 6

Profits and risks are shared between the policyholder and the insurer.

There are both guaranteed and discretionary benefits.

Typically used for savings products buy also used for protection.

Question 7

Unit linked

Answer 7

Benefits depend on the performance of the underlying assets.

Experience risks are generally borne by the policyholder, unless three is a minimum guaranteed benefit.

Used for both savings and protection products, but normally only where there is a significant investment element.

Question 8

Index linked

Answer 8

Gives a benefit that is linked to the performance of an economic or investment index.

Premiums may move in line with the same index, or may be fixed in monetary terms.

Question 9

Pure endowment/ Endowment assurance

Answer 9

• 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 dependant protection.

Question 10

Whole life assurance

Answer 10

Provides a benefit on the death of the life insured whenever that might occur.

Question 11

Term assurance

Answer 11

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.

Question 12

Convertible/renewable term assurance

Answer 12

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.

Question 13

Immediate annuity

Answer 13

Involves a single premium purchasing an income stream, which commences immediately after purchase.

Question 14

Deferred annuity

Answer 14

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.

Question 15

Income drawdown

Answer 15

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.

Question 16

Income protection

Answer 16

Enables individuals to provide an income for themselves and their dependants during the period of long-term sickness or incapacity due to accident or illness.
Typically terminate at retirement age.

Question 17

Critical illness

Answer 17

Provides a cash sum on the diagnosis of a “critical” illness as defined by the policy documents.

Question 18

Long-term care

Answer 18

The contract can be used to help provide financial security against the risk of needing either home or nursing home care as an elderly person, ie post-retirement.