Chapter 10 - Life Insurance

Question 0

How much life insurance? (Basic benchmark)

Answer 0

Estimate the PV of insured expected future income using current income with no growth.
Estimate real income to deal with inflation.
Discount by real interest rate 2-4%

Question 1

Who needs life insurance?

Answer 1

People with financial dependants that will suffer a decline in standard of living

Determine if risk is supportable or not.

Question 2

Adjustments to BB

Answer 2

Risk
Growth of real income
Differences in tax rates

Question 3

Income taxes on life insurance

Answer 3

Face amount is not taxable
Earnings from face value are taxable
Usually beneficiary pays lower rate

Question 4

Rule of thumb for life insurance

Answer 4

Only 70%-80% of insureds future income

Question 5

The expense approach for how much life insurance

Answer 5

Determine the amount that will provide funds to pay the expected expenses of beneficiaries not covered by other income.
Estimate lifetime expenses, adjust for inflation and real interest rate.

Question 6

Income vs. expense

Answer 6

Expense is more complete but harder to estimate over time.

Question 7

Balance sheet approach

Answer 7

Project BS at death including tax effects.
Determine what assets will generate income - liquid
Estimate annual income.
Add other income - gov, spouse, etc.
estimate expenses
Determine how much extra needed, capital needed.

Question 8

Issues with expense method

Answer 8

Expenses change over time and then suddenly drop off
Averages can be used.
Estimate for different periods.

Question 9

Human capital approach

Answer 9

Estimate with Income approach
Adjust for unpaid income aspects of household duties.
Adjust for expenses that won’t occur due to death.
Higher than expense method.

Question 10

Two types of life insurance

Answer 10

Term life: just insurance

Policies that include insurance and some sort of savings feature.

Question 11

Characteristics of term insuranc

Answer 11

Pays gave value to beneficiaries if the insured dies during the term.

Participating or non
Level term or decreasing term.

Question 12

Pure premium

Answer 12

Premiums set at the level where the PV of revenues received by the company equals the PV of the benefits paid.
Mortality tables are used to determine probability.

Question 13

Actual premiums

Answer 13

Benefits are paid throughout the year so they must be discounted.
Service costs are added
Profit added
Premiums increase as you get older because P of death goes up

Question 14

Average life expectancy

Answer 14

79 for men

85 for women

Question 15

GET NSP AND NAP EQUATIONS.

Answer 15

Slide 10-22&23

Question 16

Factors affecting term life insurance premiums

Answer 16

Age
Gender
Health
Selling and admin
Length of term
Adverse selection

Question 17

Group term life

Answer 17

Premiums vary group to group along with mortality tables.

Question 18

Life insurance with savings feature

Answer 18

Premiums set higher than the expected mortality costs in early years.
Overpayment is invested and accumulated as cash surrender value.

Question 19

Types of life insurance with savings

Answer 19

Whole life - level premiums, cash surrender.

Question 20

Endowment life

Answer 20

Pays face amount to insured at a certain age

Question 21

Universal life

Answer 21

Combines term insurance and a separate investment account
Premiums can be paid from investment account
Flexible

Question 22

Risk management in life insurance

Answer 22

Need for life insurance is highest when resources are lowest.
Term policies cost less to provide risk mgmt

Question 23

Personal investment vs insurance company investment

Answer 23

Return on whole life is inferior than others.
Effects of commissions costs for whole life.
Enforces savings- automatic, disciplines.

Question 24

Secondary policy provisions

Answer 24

Guaranteed insurability
Loan provisions
Settlement options
Convertibility

Question 25

Disability insurance

Answer 25

Protect against risk of illness or accident that prevents full employment.
50% of disabilities exceed a year.
Many disabilities do not qualify under gov coverage.

Question 26

What are the different types are aspects of health insurance in Canada?

Answer 26

Supplements from private plans 
Private rooms
Dental
Prescription
Travel coverage

Question 27

Determine amount of disability insurance

Answer 27

Use rule of thumb - 60-80% of gross income.
Received is not taxable
Disabilities can incur major expenses.

Question 28

Terms and conditions of disability insurance to consider

Answer 28

Definition of disability
Waiting period
Benefit period
Exclusions

Question 29

Canadian life and health comp corporation coverage

Answer 29

Class A- 200k for life, 60k for registered, 60k for non-registered.
Class B- 2,000 per month
Class C health and dental- 60k