Lecture 2 Flashcards
what guaranteed factors does term insurance come with? 2
renewal
convertibility
are premiums/reserves for term insurance high or low?
low - since coverage expires prior to the higher mortality ages (85)
describe the premiums in ART term insurance
the insured pays premiums equal to the cost of mortality
- so the premiums increase each year
why does ART have terminal reserves of 0?
because every year the p/h is paying the expected cost of mortality - the insured does not have to expect to payout anything greater than that
what kind of premiums does level term insurance have
level premiums for the duration of the policy
what are the three types of decreasing term insurance?
uniform, family income, loan ammortization
what do negative reserves mean?
that premium income > expected DB payout
- this is good for insurers
why are reserves negative in the later years for decreasing term insurance?
to do
do whole life reserves exceed term reserves?
yes, by a lot
do whole life insurance policies have a cash surrender value? why ?
yes they do because a large reserve needs to be built up in anticipation of the large DB payout > large premiums
p/h is entitled to the CSV so in the event of a lapse, they can receive some money back because they’ve been paying high premiums for x amount of time
does par insurance have high or low premiums? why?
high premiums / high dividends
they build up the reserves quite a bit to increase the investment income that is earned to then distribute as dividends (large dividends) to p/hs.
what are the 3 very conservative assumptions that are used when pricing par premiums?
high mortality
low investment returns (low pricing interest rate)
high expenses
par: what happens when experience is more favourable than the pricing assumptions?
the excess is credited back to the p/hs in the form of dividends
do different premium payment periods exist with whole life par?
yes - could be 10 pay, 20 pay, life pay
par: for a given DB, the shorter the premium payment period, the higher the cash surrender value - why?
because shorter premium payment periods = much higher premiums to be paid than life-pay premium period
what are the 4 different dividend options for par insurance?
cash, PUA, enhancement, premium reduction
par: explain the cash dividend option
very unpopular since it leads to tax consequences
par: explain the PUA dividend option
Paid-up Additions
this is the most popular option
dividends are used to buy additional single premium paid-up par insurance within the policy
- it buys a death benefit equal to the dividend
- increases the overall DB of your policy over time
par: explain the enhancement dividend option
this is also popular.
dividends are used to purchase a combination of ART insurance and PUA to attain a higher total DB
par: explain the premium reduction dividend option
dividends are netted against the premium
can PUA earn dividends of its own?
yes and it also provides a CSV of its own
