Ch 2: Life ins prods - Whole life, Term assurance Flashcards
Summary Card
- Whole life assurance
- Term assurance
- Convertible/renewable term assurance
Describe a whole life assurance contract
(5 points, 11 additional subpoints)
- Pays benefit on death of life insured whenever it occurs
- Long-term protection
- cover funteral expenses
- wealth transfer between generations
- protection for dependants
- meeting any liability to taxes arising on death
- can be tax effecicient, depending on legislation
- Typically surrender value payable
- Usually increases with increasing duration in force
- Less common in RSA
- Product design decision
- Can have paid-up benefit too
- Administration costs > premiums
- Premiums paid > Sum assured
-
No group version
- employer wouldn’t want to give cover after employment
Discuss the risks to an insurance company that arise from whole life assurances
(5 risks, 12 additional subpoints)
- Investment risk
- depending on contract design
- also depends on age at entry and duration in force
- Mortality risk
- depends on age at entry into product and duration in force
- from selective withdrawals (policyholders in good health most likely to withdraw, leaving substandard lives), influenced by
- Withdrawal/persistency risk
- depending on withdrawal value compared to asset share
- healthy lives leaving…depend on premiums charged, withdrawal terms
- cannot completely eliminate this
- Expense risk
- inflation
- long term duration=> administering contract for longer and thus cost of administering > premium collected
- Financial risk
- negative asset share upon withdrawal
- if withdrawal value > asset share
Describe a term assurance contract
(6 points, 10 additional subpoints)
- Pays benefit on death of life insured within term of contract chosen at outset
- Protection contract
- at low cost compared to endowment/whole life for same level of benefit
- for dependants to protect against financial loss from death of life assured
- Decreasing term assurance also gives protection
- repay loan balance
- income for children until older to look after themselves
- Typically, no surrender value, or value at end of term
- losses on early withdrawals/negative asset share
- would encourage selective withdrawals
- relatively small asset shares
- asset share likely to be volatile, due to impact of mortality
- Usually no paid up value (similar reasons as no surrender val)
- Group version
- death benefit to employees
- protection for credit card company (pay outstanding balances)
List 4 types of invididual term assurance contract
- Level
- Decreasing
- Convertible
- Renewable
What forms can a term assurance contract take on? (4)
- Unit-linked (most common form)
- Without profits (usually)
- With profits
- Index-linked
State 2 consumer needs that can be met by a decreasing term assurance
- Repay balance oustanding on repayment loan
- Provide income for family with children until children become independant adults
State key risks to an insurance company that arise from term assurances
(5 points, 4 additional subpoints)
- Mortality risk
- Anti-selection risk is significantly more for individual than for group
- Withdrawal/persistency risk
- when asset share is negative
- especially as policyholders have a sense of their health as the policy terms evolves
- Expense risk
- Financial risk
- negative asset share
- lapse-and-re-entry
Describe a convertible/renewable term assurance
(6 points, 11 additional subpoints)
- Operates as a term assurance, with the option to
- renew at the end of the original contract,
- convert to some form of LT insurance e.g. whole life
- usually withouth requiring further medical underwriting, except AIDS test
- Needs met
- convert from term assurance to whole-of-life
- low cost death cover
- conversion certainty to permanent form when it can be afforded
- renewing without evidence (unless benefit is increased)
- Other features
- premium guarantee on renewal - same as new business premium rates as at time of conversion
- different conversion dates (specific date, on several dates, or at any date during term)
- Usually no surrender value before conversion (same reasons as term assurance)
- Group version exists
- continuation option on employment cessation
- e.g. leave employer (hence group contract), purcahse individual policy without medical underwriting
Describe the risks that exist for renewable/convertible term assurances
(5, 4 additional subpoints)
- Same as for term assurance. But, in addition, there’s significant anti-selection risk because of option to renew/convert
- Mortality risk
- Withdrawal/persistency risk
- when asset share is negative
- especially as policyholders have a sense of their health as the policy terms evolves
- Expense risk
- Financial risk
- negative asset share
- lapse-and-re-entry