Chapter 12

Question 1

True or False:
in every product design, the present value of all future cash inflows must at least equal the present value of all future cash outflows.

Answer 1

True

- the prodcut compoenents representing cash inflow must EXCEED the prodcut compoenents representing cash outflow.

Question 2

What factors are generally incorporated in acturarial approaches to product design?

Answer 2

mortality charges
required reserves
required capital
amount and timing of income taxes, and premium taxes.

Question 3

How do companies project the future admin expenses, benefit costs, and earnings for an insurance or annuity product?

Answer 3

by modeling expected expenses, benefit costs, an d earnings for a limited distribution of pricing cells, each of which contain number of identical contracts.

Question 4

What is typically included ina product’s financial design?

Answer 4

provision for unexpected financial results or for returns to the insurance company and its owners.

Question 5

timing of payable benefit and validity of payable benefit is independable and uncertain- why?

Answer 5

TERM: death benefit only payrable if insured dies before expiration date while policy is IF
wholelife: benedit only payable if the insured dies if while policy is IF.

Question 6

What is a pricing premium (premiums used in pricing)

Answer 6

the monetary amount per unit of coverage that an insurance company must collect froma customer to cover an insurance product’s cost of benefits PLUS the company’s expenses for supporting the product, fter net investment ernings.

Question 7

Premiums can take one of 3 forms. Name and define them.

Answer 7

1) Single Premium (SP) consists of one lump sum that covers all of the financial considerations for the life of the contract. 1-yr TERM life insurance policies are purchased with a single premium.
2) flexible premiums: allow customer to make payments to the company at various times to increase savings elevement. *used with universal
3) level premiums: periodic premium payments that are equal in amount. Level premiums, are generally paid monthly, quarterly or annually.

Question 8

What is a level annual premium?

Answer 8

any set of equal annual payments having a present value equal to a given single premium.

Question 9

What is the equation for estimate of future death benefits?

Answer 9

equal to number fo death benefits the company can expect to pay multiplied by the average amount of death benefit.

estimate future death benefit = (# of death benefits) x (average amount of a death benefit)

Question 10

How do companies adjust to determining the date of death payout in calculations?

Answer 10

companies simplify computations by assuming all death benefits will be paid at a specific point during our year- exact mid point of the year.
interest period, n, - thus company would multiple # of death benefits for a block of policies by the PVIF for a specific interest rate i, and 1/2 of interest period N(1/2)

Question 11

Premium calculations for multiyear term insurance must address two additional issues that are not involved in one-year term life products. What are they?

Answer 11

1) lapse rates

2) Level annual premiums

Question 12

How do decreases in the number of insured lives have on the comapany’s cost of benefits for multiyear term insurance products with level premiums?1

Answer 12

• number of premium payments the company collects each year decreases
• lapses before the company has recovered its acquisition expenses may prevent he company from recovering those acquisitions.

Question 13

What are the two features present in whole life insurance benefit calculations not present for on0year term life insurance and most multiyear term life insurance products?

Answer 13

1) death benefit coverage while the policy remains in force during the lifetime of the insured, rather than for a limited number of years
2) Cash value and surrender benefits.

Question 14

How do companies estimate the future benefit payment for while life insurance companies?

Answer 14

they estimate the timing and average amount of:

1) death benefits for each year, using appropriate mortality table.
2) lapse and surrender beenfits, based onnumber of insureds at the begining of each year and the expected lapse or surrender rates for earch year, and the surrender value per unit:

Question 15

What is the equation for calculating annual surrender benefits per unit?

Answer 15

= (number of insureds, beginning of year) x (lapse or surrender rate) x (surrender value per unit)

Question 16

What assumptions must be applyied when calculating the total future beenfit for most whole life products?

Answer 16

1) death beenfit are paid at the midpoint each year
2) surrender benefits do not begin until the policy has been IF for ++ yrs. When they’re payable its at the beginning of the year.
3) level annual premiums are collected at the beginning of each year
4) the final benefit payment for this plan of insurance will be made when insured group reaches age 115.

Question 17

What is Universal Life (UL) insurance?

Answer 17

form of cash value life insurance having flexible premiums, a flexible face amount, and a flexible death benefit amount..
- sometimes cash value is reduced by sig expense charges (surrender charges)

Question 18

What are two examples of UL insurance products?

Answer 18

• basic fixed universal life (UL) - pays at least a stated min guaranteed interest crediting rate on a policy’s cash value each year _ higher current interest-crediting rate if conditions warrent.
• variable universal life (VUL)
  has a variable cash value component. Cx given option to allocate cash value to a general account or invest in various subaccounts. No guaranteed min invest earnings or cash values for premiums allocated to variable subaccounts.

Question 19

UL policy charges are typically deducted from policy values at various times, while policy is IF depending on provisions. What conditions apply?

Answer 19

• insurer may deduct charges form the premium payment before the premium amount is added to the policy’s cash value.
• insurer may deduct charges monthly form the policy’s cash value
• insurer may deduct a surrender charge form a surrender or partial withdrawal.

Question 20

For VUL insurance, charges may be deducted from the policy’s investment returns, whenever the cash value is calculated.
when does the M&E and investment managmeent charge added?

Answer 20

1) mortality and expense (M&E) charge is typically a percentage of the cash value
2) investment management charge is deducted from the fund value.

Question 21

The UL death benefit can take one of which 3 alternative forms?

Answer 21

Option A/I) level amount death benefit
Option B/II) increase amount death benefit
Option C/III) level amount plus premium death benefit.

Question 22

What is the equation for a UL death benefit calculation? ie whats the FA equal?

Answer 22

death benefit = face amount = (face amount +cash value) = (Faceamount + premiums paid)

Question 23

Generally: a UL policy’s net amount at risk represents what?

Answer 23

the amount of the insurer’s funds that would be required at any given time to pay the policy death benefit.
at any given time, UL net amlount at risk = difference betwen death benefit and acash valye.

Question 24

What is the net amount at risk for an Option A UL death benefit?

Answer 24

the net amount risk = policy’s face amount minus cash value

Question 25

What is the net amount at risk for an Option B UL death benefit?

Answer 25

the net amount of risk = the policy’s face amount.

Question 26

What is the net amount at risk for an Option C UL death benefit?

Answer 26

The net amount at risk is equal to the sum of the policy’s faceamount and premium paid, minus cash value.

Question 27

What is thee equation for an estimated cost of death benefit for UL insurance prodcuts?

Answer 27

death benefit payment per month = (number of deaths per month) x (average benefit payment amount per death)

Question 28

How do insurers set a monthly charge for UL products?

Answer 28

estimates the number of death per month  (see equation above) 
the rate applied varies by gener, u/w Risk class and increases as the insureds age.

Question 29

What are the two monthly mortality rates that are applied to UL products?

Answer 29

1) guaranteed maximum mortality rate: specified in the contract and sets upper limit on the mortality charge.
2) Current mortality rate: rate actually used to calculate the monthly charge and is usually lower than the other rate above.

Question 30

How do you calculate the current mortality rate?

Answer 30

= (Expected mortality rate) + (mortality margin)

Question 31

How do you calculate the monthly policy charge for UL products?

Answer 31

= (monthly expense charge) + (monthly mortality charge)

Question 32

What is a no-lapse guarantee provision?

Answer 32

protects a policy from lapsing even if the policy’s cash value is insufficient to cover the monthly policy charge.
- requires that a specific premium amount is paid over time.