Ch 2: Life ins prods - Whole life, Term assurance

Question 1

Describe a whole life assurance contract

(5 points, 11 additional subpoints)

Answer 1

1. Pays benefit on death of life insured whenever it occurs
2. 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
3. Typically surrender value payable
   
   • Usually increases with increasing duration in force
   • Less common in RSA
   • Product design decision
4. Can have paid-up benefit too
   
   • Administration costs > premiums
   • Premiums paid > Sum assured
5. No group version
   
   • employer wouldn’t want to give cover after employment

Question 2

Discuss the risks to an insurance company that arise from whole life assurances

(5 risks, 12 additional subpoints)

Answer 2

1. Investment risk
   
   • depending on contract design
   • also depends on age at entry and duration in force
2. Mortality risk
   
   • depends on age at entry into product and duration in force
     –> DSAR=death benefit- supervisory reserve
   • from selective withdrawals (policyholders in good health most likely to withdraw, leaving substandard lives), influenced by
3. Withdrawal/persistency risk
   
   • depending on withdrawal value compared to asset share
   • healthy lives leaving…depend on premiums charged, withdrawal terms
   • cannot completely eliminate this
4. Expense risk
   
   • inflation
   • long term duration=> administering contract for longer and thus cost of administering > premium collected
5. Financial risk
   
   • negative asset share upon withdrawal
   • if withdrawal value > asset share

Question 3

Describe a term assurance contract

(6 points, 10 additional subpoints)

Answer 3

1. Pays benefit on death of life insured within term of contract chosen at outset
2. 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
3. Decreasing term assurance also gives protection
   
   • repay loan balance
   • income for children until older to look after themselves
4. 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
5. Usually no paid up value (similar reasons as no surrender val)
6. Group version
   
   • death benefit to employees
   • protection for credit card company (pay outstanding balances)

Question 4

List 4 types of invididual term assurance contract

Answer 4

• Level
• Decreasing
• Convertible
• Renewable

Question 5

What forms can a term assurance contract take on? (4)

Answer 5

1. Unit-linked (most common form)
2. Without profits (usually)
3. With profits
4. Index-linked

Question 6

State 2 consumer needs that can be met by a decreasing term assurance

Answer 6

1. Repay balance oustanding on repayment loan
2. Provide income for family with children until children become independant adults

Question 7

State key risks to an insurance company that arise from term assurances

(5 points, 4 additional subpoints)

Answer 7

1. Mortality risk
2. Anti-selection risk is significantly more for individual than for group
3. Withdrawal/persistency risk
   
   • when asset share is negative
   • especially as policyholders have a sense of their health as the policy terms evolves
4. Expense risk
5. Financial risk
   
   • negative asset share
   • lapse-and-re-entry

Question 8

Describe a convertible/renewable term assurance

(6 points, 11 additional subpoints)

Answer 8

1. 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
2. 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)
   • 3. 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)
3. Usually no surrender value before conversion (same reasons as term assurance)
4. Group version exists
   
   • continuation option on employment cessation
   • e.g. leave employer (hence group contract), purcahse individual policy without medical underwriting

Question 9

Describe the risks that exist for renewable/convertible term assurances

(5, 4 additional subpoints)

Answer 9

1. Same as for term assurance. But, in addition, there’s significant anti-selection risk because of option to renew/convert
2. Mortality risk
3. Withdrawal/persistency risk
   
   • when asset share is negative
   • especially as policyholders have a sense of their health as the policy terms evolves
4. Expense risk
5. Financial risk
   
   • negative asset share
   • lapse-and-re-entry