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

1
Q

Describe a whole life assurance contract

(5 points, 11 additional subpoints)

A
  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
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2
Q

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

(5 risks, 12 additional subpoints)

A
  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
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3
Q

Describe a term assurance contract

(6 points, 10 additional subpoints)

A
  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)
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4
Q

List 4 types of invididual term assurance contract

A
  • Level
  • Decreasing
  • Convertible
  • Renewable
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5
Q

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

A
  1. Unit-linked (most common form)
  2. Without profits (usually)
  3. With profits
  4. Index-linked
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6
Q

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

A
  1. Repay balance oustanding on repayment loan
  2. Provide income for family with children until children become independant adults
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7
Q

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

(5 points, 4 additional subpoints)

A
  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
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8
Q

Describe a convertible/renewable term assurance

(6 points, 11 additional subpoints)

A
  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)
      1. 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
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9
Q

Describe the risks that exist for renewable/convertible term assurances

(5, 4 additional subpoints)

A
  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
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