Chapter 2-Life Insurance Products (Whole Life and Term Assurance)) Flashcards
Describe a whole life assurance contract
Pays benefit on death of life insured whenever it occurs
- Long-term protection
- cover funeral expenses
- wealth transfer between generations
- protection for dependants meeting any liability to taxes arising on death
- can be tax efficient, depending on legislation
Typically surrender value payable
- Usually increases with increasing duration in force
- Less common in RSA
- Product design decision
Can have paid-up benefit too
- Administration costs > premiums
- Premiums paid > Sum assured
No group version - employer wouldn’t want to give cover after employment
Discuss the risks to an insurance company that arise from whole life assurances
Investment risk
- depending on contract design also duration in force
- Without profits vs With profits vs Unit-linked
- longer duration in force = larger fund = greater investment risk
Mortality risk
- depends on age at entry into product and duration in force
- WOL taken out 30 years ago by men aged 30 then
- WOL taken out now by men aged 60
- may arise from selective withdrawals (policyholders in good health most likely to withdraw, leaving substandard lives)
Withdrawal/persistency risk
- depending on withdrawal value compared to asset share
Expense risk
- the effects of inflation w.r.t the expense loadings in the premium and the size of the premium payable itself - significant expense risk for contracts with long duration in force
- long term duration=> administering contract for longer and thus cost of administering > premium collected
Describe a term assurance contract
Pays benefit on death of life insured within term of contract chosen at outset
- death benefit usually lump sum and usually fixed
- regular (fixed or increasing) or single premiums
- premiums usually guaranteed (but can be renewable)
Protection contract
- At low cost compared to endowment/whole life for same level of benefit
- For dependants to protect against financial loss from death of life assured
Typically, no surrender value, or value at end of term
- losses on early withdrawals/negative asset share
- would encourage selective withdrawals
- relatively small asset shares
- asset share likely to be volatile, due to impact of mortality
Usually no paid up value (similar reasons as no surrender val)
Group version
- death benefit to employees
- protection for credit card company (pay outstanding balances)
List 4 types of individual term assurance contract
+Level
+Decreasing
+Convertible
+Renewable
State 2 consumer needs that can be met by a decreasing term assurance
Decreasing term assurance also gives protection
+Repay loan balance
+Income for children until older to look after themselves
State key risks to an insurance company that arise from term assurances
Mortality risk, which may arise from selective withdrawals
Anti-selection risk is significantly more for individual than for group
Withdrawal/persistency risk when asset share is negative especially as policyholders have a sense of their health as the policy terms evolves:
- financial risk from withdrawal is exacerbated for decreasing TA if the cost of the benefit exceeds the premium being charged
- more oppotunities for loss to occur on withdrawal
- financial incentive for policyholder to withdraw when SA decreases (lapse and re-entry)
Expense risk
- Can be substantial expecially if term is long and premiums fixed
- No investment risk:*
- the funds that build-up under a TA are small compared with the SA
- generally too small for investment return ti have a significant impact
State the captial requirements for a term assurance
Intrinsic capital requirement are relatively small
but solvency margin requirement may effectively lead to a significant requirement.
- reserves tend to be small through the term
- initial expenses can cause initial capital strain on regular premium contracts:
- high initial commissions
- high level of underwriting
- minimum amount of solvency margin - additional assets in excess of reserves - which increases the initial capital starin
- capital requirements can be large compared with the level of premium
Describe a convertible/renewable term assurance
Operates as a term assurance, with the option to
- renew at the end of the original contract,
- convert to some form of LT insurance e.g. whole life usually without requiring further medical underwriting, except AIDS test
Needs met
- convert from term assurance to whole-of-life
- low cost death cover
- conversion certainty to permanent form when it can be afforded
- renewing without evidence (unless benefit is increased)
Other features
- premium guarantee on renewal - same as new business premium rates as at time of conversion
- different conversion dates (specific date, on several dates, or at any date during term)
Usually no surrender value before conversion (same reasons as term assurance)
Group version exists
- continuation option on employment cessation
- e.g. leave employer (hence group contract), purchase individual policy without medical underwriting
Describe the risks that exist for renewable/convertible term assurances
Same as for term assurance.
But, in addition, there’s significant anti-selection risk because of option to renew/convert
Explain the capital requirements for renewable/convertible TA
May be higher thanfor a bsaic TA, depending on the extent of any additional reserve required
- Additional reserves may be required at the start of the contract - existance of options creates extra risks and uncertainty with regard to future costs
- Additional reserves required towards the end of the contract - ensure there are sufficient reserves to pay for the additional cost of the hgiher future mortality experience
