Chapter 6 Life Insurance Products Flashcards
How is profit calculated for a LI product
\+ 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
Outcome of underwriting (3)
- Higher premium
- Lower benefit
- Declined
By what means are premiums calculated for LI contracts (2)
- Formulas
* Profit testing model
What is new business strain
- Initial loss because first months’ premiums is not enough to cover all outgo (commission, initial administration expenses, provisions, solvency capital, underwriting)
Key risks to consider with I contracts (10)
- 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)
Why is it important to monitor the experience of LI contracts and name items to monitor (6)
Important: LT nature Items: * Rates: Claim, mortality, morbidity, withdrawal * Reinsurance premiums and recovery experience * Competitors rates and benefits * Investment returns * Expenses * Sale mix
Pure endowment
- Definition
- Customer needs
- Group version
- 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
Endowment assurance
- Definition
- Customer needs
- Group version
- 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
Whole life assurance
- Definition
- Customer needs
- Group version
- 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
Term assurance
- Definition
- Customer needs
- Group version
- 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.
Decreasing term assurance
- Definition
- Customer needs
- Group version
- 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
Convertible/ renewable term assurance
- Definition
- Customer needs
- Group version
- 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
Immediate annuity
- Definition
- Customer needs
- Group version
- 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
Deferred annuity
- Definition
- Customer needs
- Group version
- 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
Income protection
- Definition
- Customer needs
- Group version
- 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
Critical illness
- Definition
- Customer needs
- Group version
- 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
Long-term care insurance
- Definition
- Customer needs
- Group version
- 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
Investment bond
- Definition
- Customer needs
- Group version
- Definition: Single premium contracts, allowing policyholders to invest in the MT or LT.
Keyperson cover Long-term care insurance * Definition * Customer needs * Group version
- 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
Income drawdown
- Definition
- Customer needs
- Group version
- 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
Customer needs met by a group version of a term assurance product
- 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.
- 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
- 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
Name two legislative restrictions that may apply to income drawdown contracts (2)
- Amount of the fund that can be withdrawn each year
* age at which drawdown must cease and a pension must be purchased.
Name the disadvantages of an income drawdown (5)
- 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.
Without profit
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
With Profit
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
Unit Linked
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)
Index Linked
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.
