Chapter 6 - Life insurance products Flashcards
What are the key features of life insurance contract?
- They are long term
- Typically only one claim
- The claim amount may be known with certainty
- They are used for protection against death or ill health, and for savings
- They may be sold to individuals or on a group basis
What is without profit contracts?
Benefits and premiums are fixed at outset.
The insurer bears the risk of experience not being as expected but also receives the profits.
Typically used for protection products but also for savings.
What is with profit contracts?
The insurer and policyholder shares the profits and risks
There are both guaranteed and discretionary benefits
Typically used for a savings product, but can also be used for protection
What are unit linked contracts?
Benefits are based on the performance of the underlying assets
Experience risks are generally borne by the policyholder unless three is a minimum guaranteed benefit.
Used for both savings and protection products, but normally only where there is a significant investment element.
What are Index-linked contracts?
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.
Assumptions needed to project profits in Life insurance
MISTER PWC MESS
- Mortality rates
- Investment returns
- sales volume and mix of business
- Tax rates
- Expense levels
- Reinsurance premium rates and recovery rates
- Premium rates per policy
- Withdrawl rates
- Commission rates
- Morbidity rates
- Expense inflation
- Solvency capital requirements
- Separate recovery for provisions
Explain how a consumer accepts a greater element of the risk under unit-linked contracts than under with-profit contracts
- Under unit linked contracts, all investment risk lies with the consumer, as investment performance directly affects the value of the unit fund and hence the main benefit
- Under a typical with-profit contract, less investment risk lies with the consumer because:
- There is still a guaranteed benefit that the insurance company must meet
- Policyholder expectations may limit the scope and speed of bonus reductions
- It is possible that shareholders ( where there are any ) share in the investment losses (as well as profits ) of the company
Pure endowment/ Endowment assurance
- Pure Endowment provides a benefit on survival to a known date and hence operates as a savings vehicle
- Endowment assurance also provides significant benefit on the death of the life insured, operates as a vehicle of dependent protection
Whole life assurance
Provides a benefit on the death of the life insured whenever that might occur
Term assurance
Provides a benefit on the death of the life assured provided it occurs within the term selected at outset.
Normally don’t have any benefit paid on withdrawal
Convertible/renewable term assurance
Combine a term assurance with the certainty of being able either to convert to a permanent form of contract (ie an endowment or whole life assurance) or to renew the original contract for a further period, all without further evidence of health being provided.
Immediate annuity
Involves a single premium purchasing an income stream, which commences immediately after purchase.
Deferred annuity
Can be used when there is the time between the date of purchase and the date when the income is required to start.
The contract can be paid for either by a single premium or by regular premiums during the deferred period.
Income drawdown
Allows an individual to leave their accumulated fund invested and draw an income from it annually.
May be limits on how much can be drawn each year and an age limit at which point an annuity must be purchased.
Income protection
Enables individuals to provide an income for themselves and their dependents during the period of long-term sickness or incapacity due to accident or illness.
Typically terminate at retirement age
