Ch 9 Life Insurance Flashcards
What is life insurance
Contract that provides for the payment of a specified sum on the event of death (human life, lifetimes)
What events can relate to life or death
Risk of dying and not leaving enough funds behind to support dependents
Risk of surviving beyond a specified time point and as a result not having funds to meet expenses
What are the tow products related to death
Whole life policy
Term assurance policy
Explain whole life policy
Pays a benefit sum assured when insured life dies, policy holder pays regular premiums
Could be lump sum but in some cases are an annuity
Explain a lapse
This is when policyholders stop paying premiums and no money will be received on the event of death
Explain a term assurance policy
Pays benefits sum assured on the death of the insured life provided the death occurs within a specified time period . If they don’t die within the time period they receive nothing
What are products related to survival
Pure endowment
Life annuities
Explain pure endowment
Pays out a lump sum if the insured life is still alive at the end of the term of the policy
Explain life annuities
Provides the insured a regular payment while they are still alive
What is a whole life annuity
When the payment is paid for the rest of the persons life
What is a temporary annuity
When the payment is agreed based on a specific term
What is a deferred annuity
When the payments start on a later date which could be purchased with a lump sum or regular premiums
What products are associated with life and death
Endowment
What is endowment assurance
Combination of a pure endowment and term assurance where there is a benefit paid whether the policyholder survives or dies within a specified term agreed upon
What are distribution channels
A way in which businesses get their products out to the public
What are four distribution channels
Intermediaries
Agency force
Own sales force
Direct sales
Explain intermediaries
Also known as financial advisors they find the best deal for their clients, they aren’t tied to any agencies and will give their clients the best quotes from companies
Explain agency force (tied agents)
Sell products of one insurance company or in some cases handful of insurers . They are paid via commission .
Explain own sales force
People employed by the insurance company with the purpose of selling their product . Paid with salary and commissions
Explain direct sales
Growing area of distribution driven particularly by technological development where insurers sell directly to the public . Through
Direct mail
Telephone sales
Internet sales
What is Group life assurance (GLA)
When employers get life insurance coverage for all their employees.
How can GLA be used
By employer to provide benefit to a dependants on the death of and employee
By credit card company to provide benefit equal to balance of dead persons debt
By suppliers with pavement in instalments to cover the risk that recovered goods are less valuable than the outstanding loan balances
What type of underwriting is done in life insurance
They check medical history , age , general health. As well as check the financial info about the policyholders
What are surrender values
Paid out if the insured life is deciding to surrender the policy forgoing future benefits
What are the paid up values
when policyholders stop paying premiums but want to be covered. This will man that a lower sum assured will be agreed upon.
Why is pricing life insurance contracts difficult
Actuaries must work out the probability of death in any future year. Taking into account that time until death affects sum assured and present value of premiums.
why is reserving important in life insurance
policies are long term so calculations should be done properly in order to security of the insurer
Regarding claims, what are the different mechanism increasing the sum assured over time
Standard contacts
With profits contacts
index linked contracts
Unit linked contracts
Explain standard contracts
Benefits agreed upon at the outset and do not change
Explain With profits contracts
When the policyholder is entitled to receive a part of the surplus of company profits
Explain index linked contracts
Index linked contracts enable consumers to obtain a benefit that is guaranteed to increase a long with an investment or economic index
Explain unit linked contracts
benefit is determined by performance of units whose value is linked to the performance of specific assets. There is a higher risk element for policyholders because the investment could lose value.
What does monitoring in life insurance include
Mortality rates over a period
claims experience
costs incurred vs budgeted by products
actual level of new business sold and policies lapsed vs expected
Why can too much new business be bad financially
New business strain - upfront costs such as commission and marketing
Operating costs - Exceeding sales expectations can elevate upfront costs
Why can too little new business be bad financially
Fixed Costs
Sustainability
What is the impact of business mix and policy size
Policy Type mix - different policies incurring different levels of new business (high strain)
Premium loading rate - Many expenses at the offset
Average size policy - If average sum of policies is lower than anticipated then expense loading may not cover actual costs
Why are surrender terms important
Insurers want to structure them to avoid financial strain when policies lapse. As early lapses can cause losses for insurer
What are selective withdrawals
Occur when healthy, low risk policyholders are likely to lapse policies
Why are selective withdrawals bad
They leave behind and unhealthy pool of policyholders which are more likely to claim which affects profits
