Chapter 6: Life Insurance Products Flashcards
What are the various life insurance products?
1> Term Assurance=> protection for dependents on death
2> Term Assurance (decreasing)=> loan repayments, family income benefit
3> Term Assurance (renewable & convertible) => cheap life cover with option to renew or convert without further medical evidence
4> Endowment insurance=> loan repayment on death/survival, savings
5> Pure endowment=> loan repayments on survival, savings
6> Whole life assurance=> funeral costs, protection for dependents, wealth transfer/inheritance tax planning
7> Critical illness=> medical treatment, protection for dependents, lifestyle enhancement on getting a serious, often terminal illness
8> Long-term care=> nursing home or home care in old age
9> Income protection=> income when off work due to sickness/accident
10> Immediate annuities=> School fees or income in retirement
11> Deferred annuities=> Retirement savings
12> Income draw-down=> retirement provision
13> Investment bond=> longer-term flexible investment with life cover
14> Keyperson cover=> sum for loss or replacement of key business person
What are features of Life Insurance
products? (5+4)
- Often Long term
- Typically one claim (death occurs once)
3> Claim amount may be known with certainty
4> Used for protection against death/ill health AND/OR savings
5> May be sold to Individuals or on a group basis
Investment types:
Subdivision by investment type
1> Without profit
2> With profit
3> Unit linked
4> Index linked
Split insurance products by investment or risk
Risk Products
1> Whole life assurance
2> Term assurance
- Fixed/decreasing
- Convertible/renewable
3> Income protection
4> Critical Illness
5> Key person
6> Long term care
Investment Products
1> Pure endowment & endowment
assurance
2> (Retirement Annuities)
3> Investment bond
4> Immediate/deferred annuity (life
annuity)
5> Income Drawdown (living annuity)
What are the 4 main investment types for life insurance contracts?
1> Without profit=> benefits are fixed at outset.
i. Insurer bears risks of experience not being as expected
ii. Receives profits
iii. Typically used for protection products=> Also for savings products
2> With profit=> profits+ risks are shared between policyholder and insurer
i. There are both discretionary and guaranteed benefits.
ii. Typically used for savings products but can be used for protection
3> Unit-linked=> Benefit depends on the performance of the underlying assets
i. Experience risks are borne by the policyholder unless there is a minimum guaranteed benefit
ii. Both for savings and protection=> significant investment element
4> Index-linked=> benefit linked to performance of an economic or investment index.
i. Premiums=> move in line with index or fixed in monetary terms
Profit equation for life insurance contracts
Profit =
+ Premiums
+ Investment income +gains
- Claims
+ Reinsurance recoveries
- Expenses and commission
- Increase in reserve
- Increase in the cost of capital
- Tax
UNDERWRITING in life insurance products
1> Decide on the level of risk
- Issue on standard terms;
- Charge higher premium;
- or lower than standard benefit
- Declined policy
2> Examples:
- Medical - fill form sex, age, smoker, status, weight
- lifestyle,
- claims,
- financial
3> Helps to avoid anti selection
4> Different products have different levels of
underwriting
Key risks under life insurance products
1> Mortality(too many deaths) / Longevity(living too long) / Morbidity(sickness)
2> Investment risks
- Strategy: Match Liabilities
- Long term; keep up with inflation
- Bonds, equities, property, cash
- Derivatives to match guarantees/options
2> Expenses not met by premium loading or charges
3> Early withdrawals before initial expenses have been recovered
- Think about underwriting
4> Credit risk - failure of a counterpart, re-insurer/broker
5> Operational risk - fraud, systems failure, regulatory charges
(Pure) endowment
Fixed term
Savings - Paid on survival to maturity date
- Endowment also pays on death during the term
Group version for employees
- Not ideal for businesses with high staff turnover
Whole life assurance
provide a benefit on the death of the life insured whenever that might occur. Surrender benefit exists
1> Purely protection
2> Benefit paid on death
3> Sum Assured agreed at outset (not necessarily fixed)
- Unit- linked example
Group version could exist, but no real need
TERM ASSURANCE
> Similar to Whole Life, but fixed term
> Benefits used for dependents, funeral expenses
> Group version exists
- Credit life
- Employees
Other versions
> Convertible
- Change to a different product e.g. whole life
> Renewable
-Extend term (instead of taking out new policy)
- Restrict timing, otherwise susceptible to doing it when most beneficial
What are examples of customers needs being met by a group version of a term assurance product?
1> Employer=> Group term assurance product for employees=> benefit paid to employees dependents on death of employee
2> Credit card company=> group term assurance on credit card holders to pay off any balance outstanding on death of a cardholder
3> Supplier of goods with payments in installments=> Group TA on creditors
ANNUITIES
1>Immediate/Deferred
- Immediate: Single premium, receive regular payments until death
- Deferred: there is time before first payment commences
- Longevity risk
Impaired annuities?
Group version e.g. pension
2> Income drawdown (living annuity)
- Fund belongs to member; Member decides on benefit
- Investment/longevity risk passed on to policyholder
INVESTMENT BONDS
1> Medium to Long term investment
2> Benefits can be guaranteed
3> Typically unit linked or investment linked
4> Usually only purchased by individuals
HEALTH INSURANCE
1> Income protection
- Income to policyholder and dependents if policyholder cannot work because of insured event occurring ( accident or illness)
- Legal considerations/Policy wording
- Incentive to return to work? pay lower than salary
2> Critical illness
- Cash sum paid on diagnosis of critical illness (defined)
- On diagnosis of a critical illness as set out in the policy documentation
- Rider benefit (additional or accelerated)
3> Long term care
- Paid when disabled or unable to perform ADLs
- Benefit could be lump sum or annuity
KEY PERSON COVER
> Policy to cover life of a key person within a business
> Lump sum to cover:
- Buy out
- Cover any losses/expenses due to loss of key person
