Chapter 2-Life Insurance Products (Whole Life and Term Assurance))

Question 1

Describe a whole life assurance contract

Answer 1

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

Question 2

Discuss the risks to an insurance company that arise from whole life assurances

Answer 2

Investment risk
depending on contract design
also duration in force

Mortality risk
depends on age at entry into product and duration in force
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
inflation
long term duration=> administering contract for longer and thus cost of administering > premium collected

Question 3

Describe a term assurance contract

Answer 3

Pays benefit on death of life insured within term of contract chosen at outset

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)

Question 4

List 4 types of individual term assurance contract

Answer 4

+Level
+Decreasing
+Convertible
+Renewable

Question 5

State 2 consumer needs that can be met by a decreasing term assurance

Answer 5

Decreasing term assurance also gives protection

+Repay loan balance

+Income for children until older to look after themselves

Question 6

State key risks to an insurance company that arise from term assurances

Answer 6

Mortality risk

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

Expense risk

Question 7

Describe a convertible/renewable term assurance

Answer 7

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

Question 8

Describe the risks that exist for renewable/convertible term assurances

Answer 8

Same as for term assurance. But, in addition, there’s significant anti-selection risk because of option to renew/convert