CHP 7

Question 1

1.1. Contracts sold by life insurance companies

Key features:

Answer 1

• Long term
• One claim – typically
• Claim amount known in advance
• Used for protection against death, ill-health or saving
• Sold to individuals or groups

Question 2

3. Pure endowment and endowment assurance

Answer 2

Pure endowment – provides a payment on survival to a specific date. This is a savings vehicle
Endowment Assurance – also pays a benefit on death before the term ends. Could provide protection for dependents.

Question 3

Pure endowment

Answer 3

provides a payment on survival to a specific date. This is a savings vehicle

Question 4

Endowment Assurance

Answer 4

provides a payment on survival to a specific date and pays a benefit on death before the term ends. Could provide protection for dependents.

Question 5

3. Pure endowment and endowment assurance

3. 3. Existence of a group version

Answer 5

A group version could for example, enable an employer to provide a retirement or death benefit to employees.

Question 6

4. Whole life assurance

Answer 6

Provide death benefit whenever that occurs.

Useful to provide for funeral expenses, tax (e.g. inheritance tax). General purpose, provide long term protection for dependents.

No consumer need for a group version.

Question 7

5. Term assurance

Answer 7

Pay on death if it occurs before end of the term, usually no surrender or survival benefit and thus does not pay out in all instances. Because of this, it’s very cost effective.

Question 8

5. Term assurance

5. 2. Use to meet customers’ needs

Answer 8

• Provides protection against financial loss for the assured’s dependents.
• DTA – could be used to cover outstanding loan or provide income for dependents for a while.
• Key person insurance for companies.

Question 9

5. Term assurance

5. 3. Existence of a group version

Answer 9

• Can be used by an employer to provide death benefits for employees.
• Can be used by credit card company to provide a death benefit for account holders.
• Any supplier of goods, can use this to cover the life of the payer.

Question 10

6. Convertible or renewable term assurance

Answer 10

Gives individuals the option to convert from the cheap term assurance to something different later, without underwriting.

e.g. option to convert for an individual in a scheme covered by group life on leaving the scheme.

Question 11

7. Immediate annuity

Answer 11

Single premium purchases a stream of income starting immediately.

Could cover the need for retirement income (rest of life) or term annuity for income required for a certain period e.g. school fees.

Group version can be used by employers to fund for pensions of employees at or after retirement.

Question 12

8. Deferred annuity (including personal pensions)

Answer 12

Single or regular premium to purchase an annuity at some future date.

Group version can be used by an employer to fund for retirement benefits for employees.

Question 13

8. Deferred annuity (including personal pensions)

8. 2. Use to meet customers’ needs

Answer 13

Enables individuals to build up pension that is payable at retirement. At vesting date, there may be a cash option. This can be more flexibly achieved by an endowment assurance with an immediate annuity starting at the maturity date.

Question 14

9. Long term sickness insurance

Answer 14

Provides income in times of incapacity due to accident or illness. Usually this terminates on retirement age.

Group version can be used by employers to provide sick-pay for employees.

Question 15

10. Critical illness

Answer 15

Provides a cash lump sum on diagnosis of a critical illness. Could be used to provide care. It covers the need for financial security in the event of contracting such illness.
Usually no payment on death, it could be bundled in an accelerated or non-accelerated version of death cover.

Employers can use this to cover employees.

Question 16

11. Long-term care

Answer 16

Provide a lump sum or recurring benefit to cover long term care till death when needed.

Employers can cover employees and employees parents.

Question 17

12.1. Without-profit (non-participating) contracts

Answer 17

Insurance company has no discretion over the amount of benefit payable.

Question 18

12.2. With-profit (participating) contracts

Answer 18

Policy holder is entitled to receive part of the surplus of the company. This is up to the company’s discretion.

Question 19

12.3. Unit-linked contracts

Answer 19

Any of the type of contracts can be written in this form – usually only for contracts with a large investment element.

Customer takes more investment risk and thus have a higher expected return than compared to non-linked versions. It can either be a higher expected level of benefit for the same premium or same expected level at a lower premium.

This type of contract may offer more flexibility – choice of fund, levels of cover, premium flexibility.

Question 20

12.4. Index-linked contracts

Answer 20

Benefit guaranteed to move in line with an index. Normally the index will be an investment or economic index, premiums may move in line with the index or be fixed in monetary terms.