AFE 1 Flashcards
Tontines
any arrangement under which amounts are paid into a fund by participant who receive payments from the fund only for as long as they live, with a portion of the forfeited fund of deceased participants being used to augment payment to survivors. When participants died, their annuity payment ceased. Portions of these former payments are then allocated among the survivors in what today are called benefits of survivorship.
Mortality risk
Possibility that one’s death creates undesirable financial consequences for others; covered by life insurance (or life assurance)
Longevity risk
possibility of outliving one’s financial resources; covered by endowments, annuities and pensions, and
Morbidity risk
possibility that injury, illness, or incapacity creates unacceptable financial consequences; covered by health insurance, disability income insurance, and long term care insurance.
Economy of scale
marginal costs savings that exist when a firm’s output increases at a rate faster than attendant (associated) increases in production costs, holding product mix constant, i.e. average cost decrease.
Human capital
is the productive capacity within each person and is considered to be the driving force in economic growth. Investments are made within oneself with an expectation of future benefit. Present value of an individual’s future earnings.
Human life value
is a measure of the future earnings or value of services of an individual – that is, the capitalized value of an individual’s future earnings less self-maintenance cost such as food, clothing, and shelter. A person may have more than one HLV i.e. viewpoint of an organization for employee HLV is based on the value added to the enterprise through his services to the firm.
Endowments
are life insurance policies that pay a stated sum if the insured dies before a prescribed time period and usually the same sum if the insured survives the time period. Endowments pay out a lump sum if the insured after a specific term (on its maturity) or on death
Life insurance Policies that pay a prescribed death benefit if the insured dies during the policy term are commonly labeled
variously called the face amount, sum assured or death benefit amount on the death of the insured (applicant).
Bundle policies
the policyholder is not informed as to how the premium is allocated to cover the insurer’s operational expense, taxes, and contingencies; to pay for the pure insurance component; to build cash values; or to support the scale of dividends for participating policies.
unbundled policies
contemporary policies that discloses to the policyholder the portion of his/her premium that are allocated to pay for the costs of the internal insurance; to build cash value; and to cover the insurer’s expenses, taxes, profits, and contingencies.
renewable
Term policies with level death benefits and increasing premiums are commonly referred to as renewable, granting the policyowner the right to continue the life insurance policy for one or more specified periods merely by paying the billed premium.
Net amount at risk (NAR)
Difference between the policy death benefit and the cash value or policy reserve.
Universal life insurance (UL)
are characterized by flexible premium payments and adjustable death benefits whose cash value and coverage periods depend on the premiums paid into them. Usually Nonparticipating but they routinely share in the insurer’s operational results via nonguaranteed policy elements other than dividends. All cash value policies are a combination of term insurance and a savings element.
Whole life insurance (WL)
typically requires the payment of fixed premiums and promises to pay a fixed death benefit whenever the insured dies and therefore, is life insurance intended to remain in effect for the insured’s entire lifetime. Often participating, but nonpar policies also exist. Unlike UL policies, premiums for WL policies (1) are directly related to the amount of insurance purchased, (2) must be paid when due or the policy will terminate, and (3) are calculated to ensure that the policy will remain in effect for the entire lifetime of the insured, which often is assumed to be age 100 or 121.
Ordinary life (aka level premium whole life)
uniform premiums are assumed to be paid over the entirety of the insured’s lifetime. Lowest premium and cash value.
Paid up
meaning that no further premiums need be paid and the contract is guaranteed to remain in effect for the insured’s entire lifetime. At this point, the premiums paid into the policy equal the cash value (face value equals the cash value). This means that the policy has been paid for and the insured owns the benefits until death when they are paid to the beneficiary.
single premium whole life
the WL policy with the highest premium (and highest cash value, which only a single (large) premium payment is made at policy inception.
Endowment insurance
life insurance that makes two mutually exclusive promises: to pay a stated benefit if the insured dies during the policy term or if the insured survives the stated policy term. IF paid on survival, the policy was said to endow. Endowments are life insurance policies that pay a stated sum if the insured dies before a prescribed time period and usually the same sum if the insured survives the time period.
Annuity certain
makes payments for a set period of time without reference to whether the annuitant is alive.
Three broad categories of potential economic losses associated with the risk are
a. Medical expense when injured or sick.
b. Incur expense to provide long term care if mental or physical illness, injury, or old-age prevents them from engaging in the activities of daily leaving
c. Poor health or incapacity which means reeducation or even elimination of wages.
Medical expense insurance, long term care (LTC) insurance, and disability income insurance policies are designed to meet loss exposures, respectively, to the above health risk.
guaranteed renewable health insurance policies
the insured has the contractual right to continue the policy by the timely payment of premiums, usually a specified age, but the magnitude of future premiums usually is not guaranteed.
Homogeneous Exposure Units – or identically distributed
Random variables whose probability distributions prescribe the same probability to each potential occurrence, which renders the distribution expected (IID –independent and identically distributed) values and variance equal. This condition is important because it allows insurers to charge each independent and identically distributed (IID) insured the same premium.
Pricing elements
(Mortality, investment, expenses and taxes, persistency). Gross premium for many bundled par cash value polices are calculated using the maximum mortality and loading charges and minimum guaranteed interest rates, resulting in comparatively high, conservatively set premiums. Participating life insurance has been associated closely with mutual (policyholder-owner) insurance companies and nonpar has been associated more closely with stock (stockholder-owner) insurers.
Experience factors
Experience factors are the actual results experienced by an insurer as to mortality, investment returns, expenses, taxes, and persistency. Experience factors allow actuaries to derive actual mortality charges to be levied against policies, interest rates to be credited to their cash values, and loading charges to be levied, irrespective of whether they are stated this way or disclosed.
Persistency
is the percentage of life insurance policies not terminated by lapse or surrender. Persistency is not a policy element as are mortality charges, interest credits, and loading charges, but is important as assets that insurers accumulate from block of policies do not precisely equal the liabilities that arise from those polices.
lapse
is the termination of a life insurance policy and the insurer’s obligations after expiration of its grace period for failure to pay a premium necessary to maintain it in full effect.
asset share
the conceptual segmentation of individual policies of an insurer’s general account investment accumulated on behalf of a group of policies.
Surplus strain
Condition that occurs when a life insurance policy is surrendered and its assets share is less that it cash surrender value.
Surrender gain
Condition that occurs when a life insurance policy is surrendered and its assets share is greater that it cash surrender value.
Life insurance products are classified into one of four categories
ordinary, industrial, group, or credit.
Renewability
Level death benefits and premiums although level for each interim period, increase with each renewal and is based on the insured’s attained age at renewal time. Scale of guaranteed future premium rates is contained in the contract, although some policies have indeterminate premiums that allow the company to charge rates lower than those guaranteed in the policy.
Reentry
Provision within some term life policies that allows for the payment of premiums lower than guaranteed renewal premiums and sometimes lower than indeterminate renew premiums if the insured can demonstrate that he or she meets continuing insurability criteria.
Select mortality tables
show probabilities of death by age, sex, and duration of insurance for newly insured lives only. These insureds exhibit lower death rates than other of the same age and sex, since they must have been in good health and otherwise insurable to qualify initially. The select period or benefit of selection usually last from 5 to 25 years. Insurer can demonstrate continued insurability, therefore enjoy lower premium rates based on select mortality for their attained age.
Ultimate mortality tables
show probabilities of death by age and sex of insureds after the select period. The benefit of selection has faded from the mortality experience for the ultimate group. Insurer can NOT demonstrate continued insurability, therefore, ultimate rates are charged thereafter.
Aggregate mortality tables
show probabilities of death by age and sex of insureds by combining both select and ultimate mortality.
Policies that Provide a Level Death Benefit
Term policies with increasing premiums are commonly referred to as contracts that are renewable, a term that is synonymous with increasing premium. Other examples include YRT, ART. Whatever the renewal period, premiums increase at each renewal, more or less tracking the increase in mortality rates for the insured’s attained age or an average of future such rates over the next term period. Riders are available to supplement a permanent policy.
Policies that Provide a Non-Level Death Benefit
policies whose face amount decreases or increase with time. Decreasing term polices are commonly used to pay off a loan balance on the death of the debtor/insured in connection with a mortgage loan or a business or personal loan:
Cost of living adjustment (COLA)
rider that provides increasing term insurance that provides automatic increase in a policy’s death benefit in accordance with increases in inflation, as measured by a national cost-of-living index, such as the Consumer Price Index (CPI)
Return on premium (ROP) term policy
sold as a rider. Unlike the return of premium death benefit, this policy promises to pay an amount equal to the sum of premiums paid for the policy if the insured survives to a certain period, which may be from 10 to 30 years, depending on the insured’s age and insurer’s requirements. One insurer’s regular 30 yr level premium term policy for $1 mil carries an annual premium of $1,178. Its $1 mil ROP policy issued on the same basis carries an annual premium of $2,570. The annual premium difference of $1,392 effectively provides for the cash value buildup; i.e, the “return of premium’ feature, which would equal $77,100 (2,570 x 30) payable in 30 years if the insured survives to that point. If the insured dies before 30 years, the $1 mil face amount is paid.
Contributory plan
employer and employees make contributions toward the plan’s premiums
Noncontributory plan
only employer makes contribution toward plan costs
Probationary period
(waiting period) is the period of time (usually one to six months) after being hired that a new employee becomes eligible to participate in an employee benefit plan. After completion of probationary period, under a noncontributory plan, the employee automatically is coved.
eligibility period
b. Under a contributory plan an employee is given a period of time, known as the Eligibility period: under a contributory employee benefit plan, the period of time that an employee is given during which he or she is entitled to apply for insurance without submitting evidence of insurability.
Front-end load
some unbundled polices also feature an explicit front-end load which is deducted from premium payments for expenses, taxes, contingencies, and sometimes profit.
Universal life policies typically offer two optional death benefit patterns:
i. Option A: the death benefit remains level. The net amount at risk (NAR) decreases as the account value increases (and vice versa)
ii. Option B: Provides a level NAR, so that the death benefit equals what is sometimes called the face amount in UL parlance (which is the same as the death benefit in Option A) plus an additional death benefit equal to the account value.
SEC
Securities and Exchange Commision
FINRA
Financial Industry Regulatory Authority
guaranteed minimum death benefit (GMDB)
Offered by most VUL policies that feature or rider for an additional premium, which guarantees that a specified minimum death benefit will be paid irrespective of whether the policy account value is positive, provided benchmark premiums have been paid.
Equity-indexed universal life (EIUL)
aka indexed UL. is a comparatively recent UL variation with the same operational characteristics and platform as generic UL products but with an interest crediting rate being either that which the insurer uses for its general account-based products or that determined by reference to one or more equity indexes, such as the S&P 500 index. EIUL differs from generic UL as well as VUL in this interest crediting mechanism.
Operational Details of Equity-Indexed Universal Life Insurance
as with other non-variable life products, the EIUL account value is backed by the insurer’s general account assets, but it is divided into two or more policy accounts: a fixed account and one or more index accounts. The placeholder decides on the funds to be allocated to each account.
The fixed account crediting rate is typically the same as that found with the insurer’s other UL policies, bring influenced by the investment returns in its general account.
Index account
is that portion of the EIUL cash (account)value for which the crediting rate is determined by changes in an equity index, subject to a guaranteed minimum crediting rate, called the growth floor, and a maximum crediting rate, called the growth cap. Index performance rate x participation rate = index crediting rate (taking into account growth caps)
Index performance rate
the change in the index’s market value. Dividend income ordinarily is excluded in deriving this rate. Each transfer of funds into the index account creates a new segment of a specific duration, called the segment term. Upon maturity of each segment term, the index crediting rate calculation is restarted. The effect of this reset is to carry forward gains and avoid carrying forward loses, as the zero percent floor insulates the account value.
Participation rate
Under an equity indexed universal life policy or annuity, the proportion of the index performance rate that is counted in deriving the growth rate.
Importance of Cash Values
All whole life policies involve prefunding of future mortality costs. The degree of prefunding is a function of the premium payment pattern and duration. Because of prefunding, all WL policies are required to have cash values, and the cash value must build to the policy face amount by the terminal age of the underlying mortality table.
Net cash surrender value
its gross cash value less surrender charges (or back-end loading) and the value of any outstanding loans plus the value of any dividends on deposit and the cash value of any paid up additions.
Dividend options
Dividends may be applied or taken I one or more several ways. Policyowner elects the desired option:
a. Cash – pay cash each year to policyowner
b. Apply toward Premium payment
c. Purchase Paid up addition insurance-(aka paid up additions PUAs) the dividend is applied as a net single premium at the insured’s attained age to purchase as much paid up WL insurance as it will paid up.
d. Accumulate at interest – Dividends held by the insurer to accumulate at interest under the contract.
e. Purchase one year term
Pre-need funeral insurance
WL that pays death proceeds specified by the details of the goods and services to be delivered by the funeral provider. Whole life insurance benefits earmarked to prefund future funeral expenses.
Grace Period Provision
requires the insurer to maintain the policy in force and to accept premium payments for a certain period after the premium due date or if the policy has insufficient account value to permit it to continue in force. State requires a minimum grace period of 30-31 days. UL policies typically offer 61 days. During this period, insurer is required to accept payment and not require evidence of insurability as a condition of premium acceptance. Insurer is required to: 1. Accept payment even though is late and 2. May not require evidence of insurability.
Reinstatement clause
gives the policyholder the right to reinstate a lapsed policy under certain conditions. The two most important conditions are 1. Furnishing evidence of insurability and 2. Paying past due premiums or charges.
Misstatement of age or sex provision
required life insurance policy provision stipulating that, if the insurer’s age is found to have been misstated, adjustment will be made in policy values to reflect the true age. Incontestable clause does not apply to age or sex misstatement.
Revocable designation
one that may be changed by the policy owner without the beneficiary’s consent. An irrevocable designation is one that can be changed only with the beneficiary’s express consent.
Simultaneous death of insured and beneficiary
If the insured and the beneficiary die in the same accident and no evidence shows who died first, the proceeds of the policy shall be distributed as if the insured had survived the beneficiary. Thus proceeds are paid to the estate of the insured. If the proceeds are payable in a lump sum and no contingent beneficiary is named, no matter who is determined to have survived, the proceeds will be paid into the state – of either the insured or the beneficiary.
Policy loan provision
Cash value life insurance policy provision requiring the insurer to make requested loans to policyowner’s on the sole security of the policy’s cash value, subject to certain limitation. Key elements are:
- The insurer will lend to the policyowner an amount not to exceed the net policy cash surrender value less interest to the next policy anniversary (and, for variable policies, a further reduction typically of 10%) and, with UL policies, a deduction for charges for the balance of the policy year.
- Loan interest is payable annually at a rate specified in the policy
- Any due and unpaid interest will be paid automatically by a further policy loan.
- If total indebtedness equals or exceeds the cash surrender value, the policy will terminate, subject to the grace period
- The policyowner may repay the loan in whole or in part at any time, and
- If the policy terminates by surrender or death, the indebtedness will be deducted from policy proceeds.
Automatic Premium Loans (APL)
)– a provision within the policy. If a premium is unpaid at the end of the grace period and if the policy has sufficient net surrender value, the amount of the premium due will be advanced automatically as a loan against the policy. UL polices, by their nature, have no need for APL provision.
Dividend Options
dividends may be 1.received in cash, 2.applied toward payment of the premium, 3.used to purchase paid up additions, 4.left with the company to accumulate at interest, and 5.used to purchase on-year term insurance.
Living Benefit Riders
Promise to pay some or all of a policy’s face amount prior to the insured’s death if the insured suffers some specified adverse health condition. Also sometimes called accelerated benefit rider.
Annuitization
conversion of a savings annuity to a payout annuity that liquidates principal over the course of an annuitant’s life or a stated period
Fixed annuities (FAs)
credit investment returns to policies based indirectly on the performance of the insurer’s general account investment or directly in changes in a specified inflation or equity index
Variable annuities (VAs)
depend directly on the performance of separate account funds specified by the owner
Annuities may be purchased with a single lump-sum premium or flexible. The three basic purchase structure are:
single premium immediate annuity (SPIA), the single premium deferred annuity (SPDA), and the flexible premium deferred annuity (FPDA).
The determination and commencement of benefits are simultaneous with SPIA, SPDA and FPDA. The amount of the annuitized benefit payment depends on the insurer’s expected mortality and interest earnings at the time of annuitization. Insurers have also begun to offer longevity annuities (deferred income annuities)
which are single premium deferred annuities (SPDA) that guarantee future income payments based on current rates, the income typically commencing a decade or more into the future and typically providing no death benefit or surrender value during the accumulation period.
SPIA
begin to pay benefits one period, typically a month, after a simple premium is paid. They are in liquidation at the beginning of the contract.
SPDA and FPDA
are both deferred annuities, the difference being the former is purchased by a single premium and the latter with flexible periodic premiums. Both serve as savings accumulation vehicles until the owner elects to annuitize, thus converting to an immediate annuity.
Differed annuities have two periods
The accumulation period (premiums paid and cash value accumulate) and the liquidation period (annuity payments made). The annuitant is said to enter onto the annuity at the time the accumulation period ends and liquidation via an income option begins.
General Account Fixed Annuity
FPDA and SPDA contracts typically guarantee a minimum interest rate. Most insurer use a back-end load or surrender charge on policy termination. Most contracts permit a free withdrawal corridor, meaning that no surrender charge will be assessed on limited cash value withdrawals, such as those of less than 10% of the cash value. anticipated
Equity-Indexed Annuities (EIA)
is a fixed annuity contract whose interest crediting mechanism is either a guaranteed minimum rate or a rate derived directly from an external index, such as the standard & Poor’s 500 index in the US. The minimum rate is 0-2%. It contains elements of both fixed and variable annuities. The minimum guaranteed interest rate provides a downside guarantee. Like Vas, they offer the potential for stock-market-like gains by tying the current crediting rate to equity indices, thus providing upside participation. Most EIA are issued as SPDA, although flexible premiums varieties are emerging. EIA function similarly to equity-indexed universal life insurance (CH3). The upside participation generally is stated as a percentage of the increase in the index from issue to maturity.
Index-linked interest credits
are calculated over the index term (5-10 yrs) and added to the policy’s account value based on the indexing method, performance of the index, the participation rate, any cap, and the guarantee.
Substandard Mortality Annuities
most life annuities are issued without underwriting or any evaluation of the annuitant’s health. However, two classes of annuities are available for annuitants whose mortality experience is expected to be below average, which are SSA and Substandard Annuities.
Structured Settlement Annuities (SSA)
is a SPIA contract issued by a life insurer whereby the plaintiff (the injured party) receives periodic payments via a life annuity paid by the defended (or the liability insurer) in a personal injury lawsuit instead of the more common lump sum payment.
Retirement Plans
This section identifies group products provided by employers and retirement plan trust that protect a retirement plan sponsor from the financial risk of plan participants living longer than average lives.
Qualified plans
are retirement plans that satisfy the requirements of the federal employee retirement income security act (ERISA) and the federal internal revenue code (IRC).
Qualified pension plans come in two generic
Defined benefit plans specify the benefits required to be provided participant employee at retirement and Define contribution plans specify the contributions that sponsored are required to make to each participant’s account
Employer Responses to Rising Costs
Employers response to rapidly increasing costs by raising the share of costs paid by employees or limiting the employer’s contribution in other ways. Such as increasing employee contribution, co-payment, introduction of flexible plan, termination of benefits, etc. P48
Health maintenance organization (HMO)
which are health care financing and delivery corporation that contract with doctors, hospitals, and other providers to provide services to beneficiates rather than cash reimbursement and through preferred provider organizations (PPOs)
Flexible Spending Accounts (FSAs)
accumulate pretax salary deductions to be applied to the reimbursement of a variety of plan participant health care, dependent care and other benefits. Employees who do not use their entire FSA account funds forfeit their end of year balance to the employer sponsor.
Health Savings account (HSAs)
permits individuals to accumulate pretax contributions to pay qualified medical expenses associated with high deductible health plans, which are defined as medical expense plans with an annual deductible exceeding $1,200 for an individual or $2,400 for a family in 2011.
Medicare Supplement Policies
pays benefits for services not fully covered under medicare.
Self-Funded Plans
claims are paid in cash as they arise with no element of prefunding through commercial insurance. The intent is to avoid the administrative costs of transferring individual risks. With self-funding plan, the employer essentially must recreate the services of a small insurance company and be mindful if they lack the financial capacity to satisfy cash flow strain in the event of extraordinary losses. Self-funding employers usually responds to these concerns by 1. Outsourcing administrative services and 2. Purchasing stop loss reinsurance to cover extraordinary claims.
Stop Loss Reinsurance
reimburses a self-funded employer for claims incurred above certain limits and is available on an individual or aggregate basis.
Medicare Part A
covers hospital and nursing home care facility charges.
Medicare Part B
pays for physician, nursing and testing services as well as durable medical equipment such as mobility devices, prosthetic devices, and oxygen supply machines.
Medicare Part C
Provide the option of receiving Medicare benefits under private insurance plans for beneficiaries with both Part A and B coverages under which benefits are more liberal than standard Medicare benefits and may require supplemental premiums by policyowner. Also known as Medicare Advantage Plans.
Medicare Part D
provides prescription drug benefits under stand-alone plans that are distinct from Medicare Parts A, B, C. Part D coverage is available only through private insurance and subject to additional premiums.
The Patient Protection and Affordable Care Act (Obama)
- Basic Mechanics of Health Care under the Affordable Care Act – The program will be administrated by the federal department of health and human services (HHS). Individuals are required to maintain health care coverage. Failure to do so incurs fines of $695 for individuals and the greater of $2,085 or 2% of taxable income for families.
Employees with more than 50 employees are required to provide minimum coverage or pay fees to the government of $2,000 per each employee. Small employers are not required to provide coverage but are eligible for tax credits ranging up to 50% of contribution if they do provide coverage. Plan sponsors and insures will be required to maintain a minimum loss ratio of 85% for large groups and 80% for smaller groups. Health care must be provided on a guaranteed issue basis – no one can be declined. Lifetime benefit limits are abolished and coverage must be provided to dependents to age 26.
