Mod 5 set 1 Premature Death

Question 1

The problem of premature death

Answer 1

One cause of Economic Insecurity previously discussed is when a person with unfilled obligations dies (i.e. premature death)
– Examples of unfilled obligations include:
o a family (young children and a spouse) to support o education of children
o mortgage payments to be made on a house
o other outstanding loans

Question 2

Individual Life Insurance Importance

Answer 2

• provides financial protection for individuals, families, businesses
• assists in making savings possible for premature death needs
• encourages thrift (regular disciplined payments)
• furnishes a safe profitable investment
• estate planning: can use insurance proceeds to help pay estate taxes

Question 3

Types of Individual Life Insurance

Answer 3

1. Term Life Insurance
2. Whole Life Insurance
3. Endowment Insurance
   - DB paid at time of death, or if you’re still living benefit is paid out at end of period )not sold in North America anymore
4. Universal Life Insurance
   - non traditional, has investment component

Question 4

Term Life Insurance

Answer 4

An “n-year” Term Insurance policy provides for a death benefit only if death occurs within the term of the policy (within n years)
o if insured survives to/beyond the end of the term, no benefit is paid

Question 5

Key Characteristics of Term Life Insurance

Answer 5

• least expensive
• do not have a “cash value”
• no investment component
• commodity product
• lapse rates usually highest for term insurance
• renewability and don’t have to get underwritten again
• CONVERTABLE to whole life with no underwriting (those who are not as healthy are more likely to convert)

Question 6

What is adverse selection

Answer 6

result of lapse rates; means people in good health are the ones most like to lapse their policies

Question 7

Types of Term Insurance Policies

Answer 7

1) Level Face Amount (or Level death benefit) policies
- majority
- benefit is fixed
2) Non Level Face Amount
- example: mortgage term insurance: face amount of death benefit decreases (very popular) adjusts to inflation

Question 8

Describe some key characteristics of Whole Life Insurance

Answer 8

– Whole Life (WL) insurance provides for the payment of the face amount (death benefit) regardless of when death occurs
– premiums for whole life policies are much higher than for a term
– Most whole life insurance products have Cash values

Question 9

Is it possible to borrow against a Whole Life insurance policy that has a cash value?

Answer 9

– If a policy has a cash value, the policy holder can borrow against the loan (interest is charged on these loans, if the loan is not paid off by the time of death, then the outstanding amount is taken off the benefit received)

Question 10

What are the different types of Whole Life insurance policies?

Answer 10

(a) Ordinary Whole Life Insurance
(b) Limited Pay Whole Life Insurance
(c) Participating versus Non-Participating Whole Life Insurance

Question 11

Explain Ordinary Whole Life insurance.

Answer 11

– is a policy where the periodic premiums are payable for ‘the life of the policy’ and death benefit(DB) is paid regardless of when death occurs

Question 12

Explain Limited Pay Whole life insurance

Answer 12

– is a policy where the periodic premiums are payable for a limited # of years, but DB is still paid regardless of when death occurs
– a popular example of this would be a “20 Pay Whole Life Policy” (premiums payable for 20 years)
– after 20 years, the policy is said to be ‘paid up’

therefore there is a higher cost than ordinary whole life insurance.

Question 13

Explain Participating vs. Not Participating Whole Life insurance.

Answer 13

– with Participating Insurance, all profits are shared amongst the (participating) policyowners’ in the form of dividends:
o Dividends can be taken in cash and other options are also available (i.e. use dividend to offset premiums or buy more insurance, or invest in a short term account).

Question 14

What are some key points for Group life and accident insurance?

Answer 14

• most common group benefit in canada
  • Term insurance is most prevalent type of group life insurance
  • Group Ins provides lump sum death benefit to ee’s designated beneficiary in the event of death from any cause while ee is insured
  • Key feature of Group Insurance: little or no underwriting is done

Question 15

How do Group Insurers protect themselves

Answer 15

(i) Insurers generally issue group life insurance contracts with overall maximum on amount of insurance per life and a lower non-medical maximum per life
(ii) Insurer generally requires 100% participation by all eligible ees, if the er pays 100% of the premium

Question 16

Why are group insurance rates usually lower than individual insurance?

Answer 16

there are lower costs of:
– marketing
– underwriting
– administration

Question 17

Can an employee convert their Group life insurance to individual life insurance?

Answer 17

• ees under age 65 must be provided with an opportunity to convert their group life insurance to an individual insurance policy
• allows ee to purchase an individual policy from the insurer at standard rates without evidence of insurability

Question 18

How is the death benefit usually expressed?

Answer 18

usually expressed as a multiple of annual earnings, e.g. Death benefit = 1 or 2 times annual salary

Question 19

What are some other optional benefits that the er may decide to offer?

Answer 19

(i) Waiver of Premium (if ee becomes disabled before 65, insurer can continue their policy and pay their premiums for them)
(ii) Living Benefits (pays half the death benefit to the ee if they have a terminal illness)

Question 20

What are some variations of Group Life Insurance plans?

Answer 20

(a) Accidental Death and Dismemberment (AD&D)
- Provides an additional death benefit if ee dies due to accidental causes (death benefit is usually doubled)

(b) Optional Group Life
- Allows ees to buy additional group life coverage based on individual need

(c) Dependent Life Insurance
- • tend to be nominal amounts of dependent life insurance coverage
• Coverage amount are usually stated as a flat amount

Question 21

Example of a group insurance plan

Answer 21

western example