Chapter 6-Life insuracne products Flashcards
- Describe the main feature of pure endowment in terms of:
(i) the needs of consumers
(ii) the main benefits and benefit options that may be provided
(iii) the existence or not of a group version of the product.
A pure endowment provides a benefit on survival to a known date and hence operates as a savings vehicle, for example to provide a lump sum on retirement, or a means of repaying a loan.
- Describe the main feature of endowment assurance in terms of:
(i) the needs of consumers
(ii) the main benefits and benefit options that may be provided
(iii) the existence or not of a group version of the product.
An endowment assurance also provides a significant benefit on the death of the life insured before that date and, in this case, operates also as a vehicle for providing protection for dependants.
A group endowment assurance would enable, for example, an employer to provide benefits at retirement, and maybe also on death in service, in respect of his or her employees.
3, Describe the main feature of whole life assurance in terms of:
(i) the needs of consumers
(ii) the main benefits and benefit options that may be provided
(iii) the existence or not of a group version of the product.
A whole life assurance will provide a benefit on the death of the life insured whenever that might occur. It is useful as a means of providing for funeral expenses or for meeting any liability to tax, such as inheritance tax or death duties, arising on the death of the life insured. It is a general-purpose contract for providing long-term protection to dependants.
There would not seem to be a consumer need for a group version of this contract.
- Describe the main feature of term assurance in terms of:
(i) the needs of consumers
(ii) the main benefits and benefit options that may be provided
(iii) the existence or not of a group version of the product.
A term assurance provides a benefit on the death of the life assured provided it occurs within the term selected at outset. As the policy will not pay a benefit in every case (as with endowment and whole life assurances), the cost is usually considerably cheaper. Term assurances do not normally have any benefit paid on early termination.
If an individual takes out the contract, it provides protection against financial loss for the assured’s dependants.
The group equivalent of the term assurance contract can be used by an employer to provide a benefit to dependants on the death, whilst in employment, of an employee.
- Describe the main feature of decreasing term assurance in terms of:
(i) the needs of consumers
(ii) the main benefits and benefit options that may be provided
(iii) the existence or not of a group version of the product.
A decreasing term assurance can be used to meet two specific needs.
Firstly, it can be used to repay the balance outstanding under a repayment loan and, secondly, it can be used to provide an income for a family with children following the death of the income provider until such time as the latter can fend for themselves.
- Describe the main feature of convertible / renewable term assurance in terms of:
(i) the needs of consumers
(ii) the main benefits and benefit options that may be provided
(iii) the existence or not of a group version of the product.
For individuals, convertible and renewable term assurances combine the attractions of a term assurance, in terms of obtaining cheap death cover, with the certainty of being able either to convert to a permanent form of contract, ie an endowment or whole life assurance, when it can be afforded, or to renew the original contract for a further period of years, all without health evidence being provided (unless the benefit level is increased).
A comparable group arrangement would be the option for an individual in a scheme covered by a group life policy to convert to some form of individual arrangement on leaving the scheme.
- Describe the main feature of immediate annuity in terms of:
(i) the needs of consumers
(ii) the main benefits and benefit options that may be provided
(iii) the existence or not of a group version of the product.
Immediate annuities meet a financial need for an income for the remainder of the life of the insured, for example after his or her retirement, or for an income during a limited period, for example to pay the school fees of the insured’s children. A single premium purchases the income, which commences immediately after purchase.
Contracts for a limited period are called temporary annuities.
A group version of the contract can be used by an employer to fund for pensions for his or her employees at or after retirement.
- Describe the main feature of deferred annuity in terms of:
(i) the needs of consumers
(ii) the main benefits and benefit options that may be provided
(iii) the existence or not of a group version of the product.
Deferred annuities can be used when there is time between the date of purchase and the date when the income stream is required to start.
The contract can thus be paid for either by a single or regular premium during the deferred period.
The contract enables individuals to build up a pension that becomes payable on retirement from gainful employment. At the vesting date of the annuity, an alternative lump sum may be offered in lieu of part or all of the pension, thereby meeting any need for a cash sum at that point, for example to pay off a house purchase loan. This is commonly referred to as a ‘cash option’.
In practice, the same aims can be achieved, in potentially a more flexible way, by combining an endowment assurance with an immediate annuity starting at the maturity date. The rate at which the proceeds of the policy in the deferment phase can be converted into an annuity might be guaranteed at outset, or current market rates might be used.
The group equivalent of a deferred annuity can be used by an employer to fund for pensions for his or her employees.
- Describe the main feature of income protection in terms of:
(i) the needs of consumers
(ii) the main benefits and benefit options that may be provided
(iii) the existence or not of a group version of the product.
Income protection enables individuals to provide an income for themselves and their dependants in the event of the insured risk occurring.
The most common insured risk is long-term sickness or incapacity due to accident or illlness.
These contracts typically terminate at retirement age, and do not provide benefits for the first period of any claim. In the first period of a claim it is assumed that the insured will have other resources, for example a company sick pay scheme or State benefit provision.
The group equivalent can be used by an employer to provide a sick-pay scheme for employee.
- Describe the main feature of critical illness in terms of:
(i) the needs of consumers
(ii) the main benefits and benefit options that may be provided
(iii) the existence or not of a group version of the product.
Critical illness contracts provide a cash sum on the diagnosis of a ‘critical’ illness, such as heart attacks, strokes or many forms of cancer, which could be used for nursing and other care. It therefore meets an important need for financial security in the event of contracting such illnesses. Normally the specific critical illnesses covered will be explicitly listed in the policy documentation. In some
jurisdictions the definition of illnesses may be standardised across all contracts of that type.
In the stand-alone contract, no benefit is paid on death.
Where the benefit is attached to another contract, typically an endowment, whole life or term assurance, it usually constitutes an acceleration of the death benefit.
A group version of the stand-alone contract could be used by an employer to provide financial security for employees in the event of contracting a critical illness.
- Describe the main feature of long-term care insurance in terms of:
(i) the needs of consumers
(ii) the main benefits and benefit options that may be provided
(iii) the existence or not of a group version of the product.
Long-term care contracts can be used to help provide financial security against the risk of needing either home or nursing-home care as an elderly person, ie post-retirement. The contract could pay for all the costs of care throughout the remainder of life (an indemnity contract), or could provide a cash lump sum, or an annuity, to contribute towards the costs of care.
A group version of the contract would enable an employer to provide long-term care cover to employees and their spouses and parents.
- Explain how an investment bond operates.
Investment bonds are single premium contracts, normally whole life, designed to enable policyholders to invest for the medium to long term. They are typically written on a unit-linked or investment-linked basis.
- Describe keyperson cover.
Keyperson cover is where a l ife and/or critical illness policy is taken out to cover the life of a key person within a business.
The benefit payable may be based on loss of profits to the business, or related to the salary of the key person (to facilitate recruitment of a
successor).
- Explain how an income drawdown contract operates.
Some defined contribution arrangements allow for ‘income drawdown’. Under such an arrangement instead of buying an annuity the fund remains invested and the member withdraws an amount of the fund each year. This may be just the income earned on the fund or may also include some of the fund capital.
- State two legislative restrictions that may apply to income drawdown contracts.
There may be legislative restrictions on the:
• amount of the fund that can be withdrawn each year
• age at which drawdown must cease and a pension must be purchased.
