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)
Unit fund notes by big slat (remember)
Three points at which life office may extrat money from unit fund to cover costs and make profit
- Directly from premiums before units are purchased
- From unit fund after units have been purchased
- From final benefit at time of claim
Approaches to recouping initial expenses on unit-linked policies
Zero initial allocation of premiums to purchase units
* Front End Load
* Policyholders may not like idea of investing for 12 months and no units have been purchased
* After initial expenses have been recouped may offer allocation rate of say 102%. (possible as profit is made from bid-offer spread)
Level deduction from premiums throughout term
* Reduced level allocation
* May be more presentable
* Greater risk for life office
Extra management charge on unit fund throughout the term
* Two types of units: Capital units and Accumulation units
* Capital units have extra management charge and are allocated for an initial period
* May allow a 100% or higher allocation rate
* Disadvantages for provider:
* Initial expenses are recouped slowly
* If future growth is poorer than expected - will not recoup expected amount (mismatched)
