Ch6: Life insurance products Flashcards
New business strain definition
- When outgo is more than income in the first month of a contract due to the insurer having to pay commission, administration and underwriting costs, set up provisions and any required solvency capital
Key risks under life insurance contracts (7)
- Mortality, longevity and morbidity
- Investment risks - poor or volatile returns, falls in asset values and default risk
- Expenses higher than expected or not covered by premium loadings or charges
- Early withdrawals before initial expenses have been recovered
- New business too high (new business strain) or too low (not enough to spread overheads)
- Credit risk - failure of a counterparty
- Operational risks - fraud; systems failure; regulatory changes
List of items life insurer should be monitoring (7)
- Claim rates - mortality rates; morbidity rates
- Withdrawal rates
- Reinsurance premiums and recoveries
- Competitors’ premium rates
- Investment returns
- Expenses
- Sales volumes and mix
Life insurance products (12)
- Pure endownment and endownment assurance
- Whole lofe assurance and funeral insurance
- Term assurance, both level and increasing
- Convertible and renewable term assurance
- Immediate annuity
- Deferred annuity
- Income drawdown
- Investment bond
- Income protection insurance
- Critical illness insurance
- Keyperson cover
- Long-term care insurance
Pure endownment and endownment assurance description
Pure endowment:
* Provides benefit on survival to a known date
* hence operates as a savings vehicle (lump sum on retirement or means of repaying a loan)
Endowment assurance:
* Provides benefit on survival to a known date as well as a significant benefit on the death of the life insured before this date
* Savings vehicle as well as vehicle for providing protection for dependants
Whole life assurance description
- Will provide benefit on death of life insured, whenever that might occur
- Useful - provide for funeral expenses or meeting liability to tax such as inheritance tax
Term assurance description
- Provides benefit on death of life assured, provided it occurs within the term selected at outset
- Cost cheaper, since benefit is not paid in every case
- No surrender benefits
- Provides protection against financial loss for assured’s dependants
- Decreasing term assurance: 1. Repay outstanding amount on a repayment loan 2. Provide income to family with children until such time that the children can fend for themselves
Convertible or renewable term assurance description
Renewable term assurance:
* Option to renew at the end of the contract
* Renewal can be made without additional underwriting
Convertble term assurance:
* Allows policyholder to convert into another type of contract such as a whole of life or endowment assurance
* Points at which conversion is allowed would depend on policy conditions - may only be on one date or on several dates or at any time during the life of original contract
* Cheap death cover with certainty of being able to convert to permanent form of contract when it can be afforded
* Group version: Allows memeber to continue policy on leaving employment
Immediate annuity description
- Single premium purchases income, which commences immediately after purchase
- Meet a financial need for income for remainder of life of insured
- Could be for retirement or limited period - pay school fees
Deferred annuity
- Time betwene the date of purchase and the date when the income stream is required to start
- Single premium or regular premium during deferred period
- Enables individuals to build up a pension that becomes payable on retirement
- Cash option - on vesting date, may be an option to take sum or all of pension as lump sum for example to pay off home loan
Income drawdown description with legislative restrictions (2) + advantages (4) + Risks for member (5)
- Living annuity
- Defined contribution arrangement - instead of buying an annuity the fund remains invested and the member withdraws an amount of the fund each year
- May just be the income earned on the fund or may include some of the fund capital
- May be legislative restrictions on the:
* Amount of the fund that can be withdrawn each year
* Age at which drawdown must cease and annuity must be purchased - Main driver: Should member die before having to secure an annuity, the member’s heirs can inherit the balance of the fund
- Other advantages:
* Member may be able to earn a return on their invested funds after tax and charges in excess of underlying annuity rates
* Member has flexibility within legislation in terms of how much to take each year as income
* Annuity rates may be currently be poor but improve in the future - Risks for the member:
* If only income earned on the fund is taken each year, member’s income could be volatile
* If too high a level of income is taken, capital could potentially reduce to zero before member dies, leaving member dependant on state
* Charges taken in relation to administering the arrangement may be high
* Remaining fund on member’s death may be insufficient to provide adequate benefits for a dependant
* There may be a tax charge on residual fund on the member’s death
Investment bonds description
- Single premium contracts, normally whole life, designed to enable policyholders to invest for medium to long term
- May be able to make withdrawals but at a penalty in first few years
- May be restricted on frequency of withdrawals at later terms
- On death bond will pay a lump sum - may be guarantee that it will not be less than original single premium
- Use: Earn higher returns on fund that are not currently required to meet needs
- Min payout on death - inheritance tax or passed on to family
Income protection description
- Enables individuals to provide an income for themselves and dependants in event of insured risk occuring
- Insured risk: long-term sickness or incapacity due to accident or illness
- Policy must define what is ment by incapacity - could be unable to work entirely or only in individual’s own occupation
- Typically terminate at retirement age
- Doesn’t provide benefits in first period of claim
Critical illness insurance description
Key need + riders
- Provides cash lump sum on diagnosis of critical illness
- Could be used for nursing or other care
- Need for financial security in event of contracting such a disease
- Specific critical illnesses covered are explicitly listed in policy wording
- Could be rider on another policy and act as acceleration of death benefit (so no benefit on death)
- Could be rider and act as additional benefit (so benefit on death as well)
Key person cover description
- Life or critical illness policy taken out to cover life of a key person within a business
- Key persons without whom business may struggle
- If individual dies or is incapacitated key person insurance pays lump sum benefit to the business
- May be used to:
* Buy out individual from partnership
* Cover any loss of profit as a result of loss of keyperson
* Meet the costs of finding a replacement - Benefit may be based on loss of profits or related to salary of key person (replacement)
