L1: Traditional Insurance Contracts

Question 1

Term Insurance and premium size

Answer 1

policy pays lump sum benefit on death of insured if death occurs within a fixed term. Premium small relative to lump sum benefit as insurer pays death benefit on small proportion of policies issued

Question 2

Company Owned Life Insurance

Answer 2

bought for family members if parent dies prematurely or business from deaths of key employers

Question 3

Level Term Insurance

Answer 3

Death Benefit is level throughout term of contract, premiums are level and regular

Question 4

Decreasing Term Insurance

Answer 4

Premiums decrease over term of contract

Question 5

Increasing Term Insurance

Answer 5

Death benefit increases over term of contract

Question 6

Renewable Term Insurance

Answer 6

Policyholder has option to renew policy at end of original term without evidence of state of health for higher premium rate

Question 7

Yearly Renewable Term Insurance

Answer 7

Contract for one year and renewable for fixed period

Question 8

Convertible Term Insurance

Answer 8

Policyholder has option to convert term insurance policy to whole life insurance policy at end of the term

Question 9

Whole Life Insurance
- what is it
- premiums are paid till when
- is it more expensive than term?

Answer 9

• permanent insurance policy, pay lump sum benefit on death of insured whenever it occurs.
• Premiums payable up to age 80 to avoid cancellation of policy for unpaid premiums at later stages in life.
• more expensive than term as everyone dies

Question 10

Whole Life Insurance
- Cash Value

Answer 10

policyholder discontinues policy after initial period, insurance company can pay partial lump sum

Question 11

Surrender value, cash surrender value

Answer 11

pay to policyholder, low in early years and high in later years

Question 12

lapse/surrendered

Answer 12

policy terminated at request of policyholder before end of original term date

Question 13

Lapse-supported insurance

Answer 13

cash value not available, excess funds used to support remaining policies so lower premiums. If policyholder permitted to sell polices to third party than profits not substantial

Question 14

Stranger Owned Life Insurance (STOLI)

Answer 14

investment firm pays policyholder who want to surrender policy in cash and takeover premium payments as long as policyholder is alive. Investment firm would receive benefit when insured/original policyholder dies. NO insurable interest!

Question 15

Viatical Settlement

Answer 15

Special type of Stranger Owned Life Insurance (STOLI), policyholder is diagnosed with terminal illness and sells policy to third party for cash

Question 16

Life Insurance Strategy

Answer 16

combine premiums with investment from income from premiums earned/received = death benefit
high conservative assumptions

Question 17

interest spread

Answer 17

market rate - interest in premium calculation.

Question 18

Conservative Assumptions

Answer 18

most policyholders (excluding those who die early), earn low returns on their premium compared to investing same amount in mutual or other investment funds

Question 19

How Insurance Company address conservative assumptions

Answer 19

charger higher premium but promise to share profits with policyholder if investment performs well

Question 20

North America and address conservative assumptions

Answer 20

Par with profit insurance, profit sharing takes form of cash dividends

Question 21

UK and Australia and address conservative assumptions

Answer 21

profits used to increased death benefit through revisionary bonuses

Question 22

UK and Australia Revisionary Bonuses

Answer 22

applied to contract increase benefit by percentage

Question 23

UK and Australia Revisionary Bonuses
i) Simple

Answer 23

bonus rate is applied to original sum insured only

Question 24

UK and Australia Revisionary Bonuses
ii) Compound

Answer 24

bonus rate is applied to total of sum insured and previous revisionary bonuses

Question 25

UK and Australia Revisionary Bonuses
iii) Super - Compound
what is also shared and not shared

Answer 25

two bonuses each year, first to original sum insured and second to total of previous bonuses declarations
profits shared but not losses

Question 26

Terminal Bonuses

Answer 26

awarded and paid on death of insured or when policy reaches end of term

Question 27

Endowment Insurance

Answer 27

Policy pays lump sum benefit either on death of insured or at end of specified term, whichever first

combination of term and pure endowment

Question 28

Joint Life Insurance

Answer 28

premium and benefits are dependent on survival of two people

Question 29

Multiple Life Insurance

Answer 29

benefit is payable on first death or on each death of specified group of individuals

Question 30

Guaranteed Cash Value

Answer 30

Can be locked in by paying additional premium, required by law in some jurisdictions

Question 31

Policyloan

Answer 31

policyholder borrow money from insurer using cash value/ benefit as collateral

Question 32

Accelerated Death Benefit

Answer 32

early payment of death benefit to policyholder suffering from terminal illness

Question 33

Accidental Death Benefit

Answer 33

Increased sum insured payable to death caused by accident

Question 34

Premium Waiver on Disability

Answer 34

rider that allows policyholders to suspend policy premiums during periods of severe illness or disability

Question 35

Family Income Benefit

Answer 35

rider that pays specified amount at regular intervals between policyholder death and end of contact term

Question 36

Critical Illness Insurance

Answer 36

benefit paid on diagnostics of specified set of critical illness or disabiilty