Chapter 6 Life Insurance Products

Question 1

How is profit calculated for a LI product

Answer 1

\+ Premiums net reinsurance paid
\+ Investment income and gains
-  Claims (death, sickness, maturity and withdrawal) net reinsurance recoveries
-  Expenses + Commission
-  Increase in revisions
-  Increase in capital
-  Tax
=  Profit

Question 2

Outcome of underwriting (3)

Answer 2

• Higher premium
• Lower benefit
• Declined

Question 3

By what means are premiums calculated for LI contracts (2)

Answer 3

• Formulas

* Profit testing model

Question 4

What is new business strain

Answer 4

• Initial loss because first months’ premiums is not enough to cover all outgo (commission, initial administration expenses, provisions, solvency capital, underwriting)

Question 5

Key risks to consider with I contracts (10)

Answer 5

• Mortality (too many deaths)
• Morbidity (sickness)
• Longevity (living too long)
• Investment risk
• Expenses not met by premiums
• Withdrawal before expenses has been recouped
• New business volume too high -> too much new business strain
• New business too low -> cannot spread expenses
• Credit risk (failure of reinsurer)
• Operational risk (fraud, system failure, reg changes)

Question 6

Why is it important to monitor the experience of LI contracts and name items to monitor (6)

Answer 6

Important: LT nature
Items:
* Rates: Claim, mortality, morbidity, withdrawal
* Reinsurance premiums and recovery experience
* Competitors rates and benefits
* Investment returns
* Expenses
* Sale mix

Question 7

Pure endowment

• Definition
• Customer needs
• Group version

Answer 7

• Definition: Provides benefit on survival to a known date
• Customer needs: Saving vehicle, e.g. provides limp sum on retirement or a means to repay a loan
• Group version: Yes, e.g. employer can provide benefits at retirement

Question 8

Endowment assurance

• Definition
• Customer needs
• Group version

Answer 8

• Definition: Provides a lump sum on the death before a certain date or maturity (can also have surrender benefits)
• Customer needs: Provides protection for dependents
• Group version: Yes, e.g. employer can provide benefits at retirement and in-service death

Question 9

Whole life assurance

• Definition
• Customer needs
• Group version

Answer 9

• Definition: Provides a lump sum benefit on death
• Customer needs: Mainly used to provide protection for dependents, e.g. can be used to meet funeral or inheritance tax liabilities.
• Group version: No

Question 10

Term assurance

• Definition
• Customer needs
• Group version

Answer 10

• Definition: Provides lump sum on the death of a life assured provided it occurs within the term selected at outset (no surrender benefit)
• Customer needs: Cheap as a benefit will not always be paid out, and does not have surrender benefits, Provides protection for dependents
• Group version: Yes, an employer provides benefits for in-service death / credit card companies death of debitor.

Question 11

Decreasing term assurance

• Definition
• Customer needs
• Group version

Answer 11

• Definition: Provides lump sum on the death of a life assured provided it occurs within the term selected at outset, sum assured decreases as it gets closer to maturity.
• Customer needs: Used to repay balances on outstanding loans, can also provide income to dependents until a time the dependents can fend for themselves
• Group: Employers can use to fill gap between in-service benefits and retirement benefits

Question 12

Convertible/ renewable term assurance

• Definition
• Customer needs
• Group version

Answer 12

• Customer needs: Combine cheap TA cover with the certainty of being able either to convert to a permanent contract when it becomes affordable or renew TA for further period (with no medical underwriting, unless benefits increase)
• Group version: Yes, e.g. individual in a group scheme to convert to individual form once they leave the scheme

Question 13

Immediate annuity

• Definition
• Customer needs
• Group version

Answer 13

• Definition: Single premium income that commences immediately provides income stream
• Customer needs: Meet income needs for the remainder of policyholder’s life (temporary annuities also exist and is only for a limited time, e.g. pay school fees +impaired annuities for individuals in poort health)
• Group version: Yes, an employer can use to fund pension of employees at or after retirement

Question 14

Deferred annuity

• Definition
• Customer needs
• Group version

Answer 14

• Definition: Annuity where there is difference between purchase date and income start date (paid with single or regular premiums)
• Customer needs: Build up pension that becomes payable on retirement (can also chose cash option with regular income payments)
• Group version: Yes, by employers to fund pension for employees

Question 15

Income protection

• Definition
• Customer needs
• Group version

Answer 15

• Definition + Customer needs: Provide income for self and dependents in the event of insured risk occurring (e.g. LT illness or incapacity to work due to accident), Typically terminates at retirement and paid out one month after claim because assume insured has enough resources to survive
• Group version: Yes, employers use to provide sick pay scheme

Question 16

Critical illness

• Definition
• Customer needs
• Group version

Answer 16

• Definition: Provides lump sum on the diagnosis of a critical illness. Explicitly lists which specific critical illnesses are cover (can also be standardised across all contracts). Usually offered as a rider
• Customer needs: Use to provide nursing and other care to maintain financial security
• Group version: Yes, employers use to provide financial security

Question 17

Long-term care insurance

• Definition
• Customer needs
• Group version

Answer 17

• Definition + Customer needs: Aid in providing financial security against the risk of needing at-home or nursing-home case as an elderly (can provide a lump sum, indemnity or annuity)
• Group version: Yes

Question 18

Investment bond

• Definition
• Customer needs
• Group version

Answer 18

• Definition: Single premium contracts, allowing policyholders to invest in the MT or LT.

Question 19

Keyperson cover
Long-term care insurance
* Definition
* Customer needs
* Group version

Answer 19

• Definition: life and/or critical illness policy is taken
  out to cover the life of a key person within a business. Benefit based on profit or salary of an individual
• Customer needs: Buy out partnership, cover losses occurred due to absence of keyperson or cost of finding a replacement
• Group version: Cover only particular employees

Question 20

Income drawdown

• Definition
• Customer needs
• Group version

Answer 20

• Definition: Can draw income (interest) or some of the capital.
• Customer needs: Die before annuity commences, which results in the descendants benefiting and not the insurance company

Question 21

Customer needs met by a group version of a term assurance product

Answer 21

1. An employer could take out a group TA contract on its employees to provide a death in service benefit, which pays out if an employee dies.
2. A credit card company can take out a group TA contract on its credit cardholders to pay off any balance outstanding on the death of the cardholder
3. A supplier of goods with payments in instalments could take out a group TA on its payees to cover the difference between the amount owing and the value of the recovered goods upon the death of the payee

Question 22

Name two legislative restrictions that may apply to income drawdown contracts (2)

Answer 22

• Amount of the fund that can be withdrawn each year

* age at which drawdown must cease and a pension must be purchased.

Question 23

Name the disadvantages of an income drawdown (5)

Answer 23

• If only the income earned on the fund is taken each year the member’s income could be volatile
• If too high a level of income is taken, the capital could potentially reduce to zero before the member dies leaving the member dependent on the State at the end of his or her life
• The charges taken in relation to administering the arrangement may be high
• The remaining fund on the member’s death may be insufficient to provide adequate benefits for a dependant
• there may be a tax charge on the residual fund on the member’s death.

Question 24

Without profit

Answer 24

Benefits are fixed at outset.

The insurer bears the risk of experience not being as expected but also receives the profits -> review premiums periodically.

Typically used for protection products

Question 25

With Profit

Answer 25

Profits and risks are shared between the policyholder and the insurer.

There are both guaranteed and discretionary benefits.

Bonuses can be regular or terminal (at the end of the contract). Once declared becomes part of the benefit.

Take into account policyholder expectations

Smooth bonus from year to year -> hold back in good to subsidies in bad

Typically used for savings product

Question 26

Unit Linked

Answer 26

Benefits depend on the performance of the underlying assets.

Experience risks are generally borne by the policyholder unless there is a minimum guaranteed benefit.

Used for both savings and protection products, but normally only where there is a significant investment element.

Consumers use them to obtain a lower premium or high benefits (higher investment risk)

Question 27

Index Linked

Answer 27

Gives a benefit that is linked to the performance of an economic or investment index.

Premiums may move in line with the same index or may be fixed in monetary terms.