Lecture 3 Flashcards
how does UL work?
- the insured selects a DB
- select a premium schedule - this is an annual deposit that between the minimum and maximum deposit allowed by the insurer
- the deposits go into a fund
- on a monthly basis, the fund is charged for mortality costs and expense (usually grouped together in a single rate called COI)
- the fund is credited interest monthly. this is the investment returns from the fund composed of the deposits. the p/h chooses the a fund from a selection that suits their risk profile
why would UL be better than par?
when the new money rate > par portfolio rate
when interest rates increase, the par portfolio rate remains constant with the old money rate
how are COI charges calculated for UL insurance?
they are calculated based on the policy’s Net Amount at Risk (NAAR)
what is NAAR equal to?
NAR = DB - Fund Value
the amount that is at risk = the amount that would come out of the insurers pocket
how is the monthly COI charge calculated?
monthly COI charge = COI * NAR
what are the two level options for UL?
- LEVEL DB: the policy pays out the db on death - so the NAR decreases over time as the fund value grows
- LEVEL NAR: the policy pays out the DB + fund value on death - so the NAR is constant for the life of the policy
what is a rider? on a UL policy
an additional insurance coverage of some sort that is attached to the base of the policy
what type of benefits can riders be?
life or non-life (ex. if you get disabled, your premiums will be paid for)
what is the min premium amount?
COI
why are reserves established?
because there is a cashflow mismatch between when premiums are received and when benefits/expenses are incurred
what is the NLP reserve? what does it rely on? 2
the classical actuarial model.
relies on:
- monotonically increasing mortality table
- single interest rate
what is a modified reserve ?
variation of the NLP reserve.
allows for expenses in early years (i guess this is the DAC reserve)
does a modified reserve use level premiums?
no, the non-level premium is used to mimic the other cash flows that actually occur other than interest and mortality
can reserves be calculated both prospectively and retroactively?
yes.
Prospective: the way we know
retro: using FV instead of PV
what is principles based reserves?
calculated based on realistic assumptions and include provisions for DB, expenses, surrender benefits
