Ch 6: Life insurance products Flashcards
List 15 life insurance products
- Term assurance (level)
- Term assurance (decreasing)
- Term assurance (renewable)
- Term assurance (convertible)
- Endowment assurance
- Pure endowment
- Whole life assurance
- Critical illness
- Long-term care
- Income protection
- Immediate annuities
- Deferred annuities
- Income drawdown
- Investment bond
- Keyperson cover
how are profits calculated for life Insurance contracts?
Premiums net of reinsurance premiums paid
+ Investment income and gains
- Claims (e.g. death, sickness, maturity, withdrawal) net of reinsurance recoveries
- Expenses and commission
- Increase in provisions (reserves)
- Increase in the cost of capital
- Tax
= Profit
Assumptions needed in Life Insurance
Assumptions needed include: ·
* premium rates per policy
* sales volumes and mix of business
* investment returns, e.g. bond yields, dividend yields and growth
* expense levels
* expense inflation
* commission rates
* mortality rates
* morbidity rates
* withdrawal rates
* separate assumptions to calculate the provisions (these assumptions may be more prudent than those used above), for example, a valuation interest rate, valuation mortality rates
* solvency capital requirements
* tax rates
* reinsurance premium rates and recovery rates.
Key Life Insurance Contract risks
- mortality (too many deaths), longevity (living too long) and morbidity (sickness)
- investment risks, e.g. poor or volatile returns, falls in asset values, default risk
- expenses, not met by premium loadings or charges
- early withdrawals, before the initial expenses have been recovered
- new business volumes too high and hence new business strain, or too low and not enough business over which to spread the overheads
- credit risk, i.e. failure of a counterparty such as a reinsurer or a broker
- operational risks, e.g. fraud, systems failure, regulatory changes.
Pure endowment/ Endowment assurance
- 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 dependent protection.
Whole life assurance
Provides a benefit on the death of the life insured whenever that might occur.
Term assurance
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.
Give examples of customer needs met by a group version of a term assurance product
- 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.
- 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
- 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
Convertible/renewable term assurance
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.
Immediate annuity
Involves a single premium purchasing an income stream, which commences immediately after purchase.
limited period are called temporary annuities
Deferred annuity
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.
Income drawdown
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.
Investment Bond or investment-linked insurance policy
“These are single premium contracts, normally whole life, designed to enable policyholders to invest for the medium to long term.
- can usually make withdrawals
- may incur a penalty in the first few years
- restrictions on the frequency with which withdrawals
- On death, the bond will pay a lump sum.
- may be a guarantee
- unit-linked or investment-linked basis”
Income protection
Enables individuals to provide an income for themselves and their dependents during the period of long-term sickness or incapacity due to accident or illness.
Typically terminate at retirement age.
Critical illness
Provides a cash sum on the diagnosis of a “critical” illness as defined by the policy documents.
Key person cover
Pays a lump sum on death or critical illness of a key individual within a business. The benefit may be linked to loss of profits or the salary of the individual and used to buy out the individual from the business or find a replacement
Long-term care
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.
- pay for all the costs of care throughout the remainder of life (an indemnity contract
- or could provide a cash lump sum, or an annuity, to contribute towards the costs of care
- reached a specified level of disability
- unable to perform a specified number of ‘activities of daily living’ (ADLs) due to physical impairment
- not be able to perform them unsupervised due to mental impairment
- paid for by single or regular premiums
- without-profit, with-profit, unit-linked and investment-linked
- regular premiums would cease from the point at which claims begin to be paid
different levels of care :
- cost of care in own home
- cost of being cared for in a residential (but non-nursing) home
- cost of being cared for in a residential nursing home
Under what circumstances are benefits paid under:
- A critical illness contract
- An income protection contract
- A long-term care contract
- Critical illness - On diagnosis of a critical illness as set out in the policy documentation
- Income protection - During periods of incapacity due to accident or illness
- Long term care - When the insured needs home or nursing home care
List the 4 main investment types for life insurance contracts
- Without profit
- With-profit
- Unit linked
- Index-linked
Without profit
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.
With profit
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.
When setting the levels of bonus include:
- the wish to smooth benefits from year to year, so keeping back some of the profit from the good years, to help in the bad years
- policyholder expectations, e.g. based on past bonus distributions by the company
- looking at what competitors are doing
- adhering to regulatory limits on payouts.
Unit linked
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.
Index linked
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.
