CH 6: Life insurance products Flashcards
1
Q
1.Overview
4
A
Design:
* Long term, single claim,known sum assured
* Designed to be profitable: Prem-Re+Inv Ret -Claims-Expenses-Commission-incr reserves-incr CoC -Tax = Profit
Underwriting:
* Process used to determine level of risk
Set pemiums:
* Formula/Profit testing model
Reserving:
* Req by regulation to cover liabilities (claims and expenses).
* Addditional reserves req to be held above this (req capital) to reach minimum level of solvency.
2
Q
NUB Strain
3,4
A
- Initial outgo > premium inflow. Losses recouped later stages
- Initial capital is used to cover this (funded)
- Premium < Comission+expenses+underwriting +incr reserves/SCR
Initial capital importance:
* Cover unexpected events & NUB strain
* Gives frredom of investment (mismatch)
* Demo financial strength
* Smooth bonuses/ cover guarentees
3
Q
Key risks faced Life Insurance
10
A
- Mortality (too many deaths),Morbidity (sickness),Longevity (living too long)
- Investment risk
- Credit risk (failure of reinsurer)
- Expenses not met by premiums
- Early withdrawal before expenses has been recouped
- New business volume too high -> too much new business strain
- New business too low -> cannot spread expenses
- Operational risk (fraud, system failure, reg changes)
M3ICEEHO
4
Q
Investment Strategy
5
A
- Depends on characteristics of liabilities.
- Fixed int/index linked bonds: Match term
- Equity/Property: Max returns
- Derivative/Local currency asstes: Hedge risk
- Influences: Regulation, initial capital, tax, risk appetite
5
Q
Pure endowment/ Endowment assurance
4
A
- 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.
- Customer needs: Saving vehicle, e.g. provides lump sum on retirement or a means to transfer wealth .Protection death
- Group version: Yes, e.g. employer can provide benefits at retirement
6
Q
Whole life assurance
3
A
- Definition: Provides a lump sum benefit on death
- Customer needs: Mainly used to provide protection for dependents, e.g. can be used to meet funeral or inheritance tax liabilities.
- Group version: No, employers want to restrict cover to employment period.
7
Q
Term assurance
3
A
- Definition: Provides lump sum on the death of a life assured provided it occurs within the term selected at outset (no surrender benefit)
- Customer needs: Cheaper as benefit will not always be paid out, and does not have surrender benefits, Provides protection for dependents
- Group version: Yes, an employer provides benefits for in-service death / credit card companies death of debitor.
8
Q
Convertible/renewable term assurance
3
A
- Definition: TA with option to renew or convert
- Customer needs: Cheaper method of wholelife cover auto-renew TA. Or convert it to wholelife at later stage no underwriting.
- Group version: Yes, e.g. individual in a group scheme to convert to individual form once they leave the scheme
9
Q
Immediate annuity
3
A
- Definition: Single premium income that commences immediately provides income stream
- Customer needs: Meet income needs for the remainder of policyholder’s life (temporary annuities also exist and is only for a limited time, impaired annuities for individuals in poor health)
- Group version: Yes, an employer can use to fund pension of employees at or after retirement immediately after purchase.
10
Q
Deferred annuity
3
A
- Definition: Annuity where there is difference between purchase date and income start date (paid with single or regular premiums)
- Customer needs: Build up pension that becomes payable on retirement (can also chose cash option with regular income payments) Large pension than immediate
- Group version: Yes, by employers to fund pension for employees
11
Q
Income drawdown
5
A
- Definition: Contributions made into fund that remains invested. Draw from here to meet needs
- Legislative restrictions on how much can be drawn/ convert to pension.
- Customer needs: Die before annuity commences, which results in the descendants benefiting and not the insurance company
- Adv: invest returns>annuity rate @ time/ Flexibility on amount withdrawn
- Dis adv: Volatile income/ Reduce capital fast/taxes
12
Q
Investment bond
2
A
- Definition: Single premium contracts, allowing policyholders to invest for wholelife. Lump sum paid on death.
- Guaranteed minimum maturity = single premium
13
Q
Income protection
2
A
- Definition + Customer needs: Provide income for self and dependents in the event of insured risk occurring (e.g. LT illness or incapacity to work due to accident), Typically terminates at retirement and paid out one month after claim because assume insured has enough resources to survive
- Group version: Yes, employers use to provide sick pay scheme
14
Q
Critical illness
3
A
- Definition: Provides lump sum on the diagnosis of a critical illness. Explicitly lists which specific critical illnesses are covered. Usually offered as a rider
- Customer needs: Use to provide nursing and other care to maintain financial security
- Group version: Yes, employers use to provide financial securitys a cash sum on the diagnosis of a “critical” illness as defined by the policy documents.
15
Q
Keyperson cover
3
A
- Definition: life and/or critical illness policy is taken
out to cover the life of a key person within a business. Benefit based on profit or salary of an individual - Customer needs: Buy out partnership, cover losses occurred due to absence of keyperson or cost of finding a replacement
- Group version: Cover only particular employees
