Reading 21 Flashcards
total wealth
human capital + financial capital
human capital
discounted PV of expected future labor income
Pension is HC or FC?
FC
economic net worth
sum of the individual’s FX and HC less any liabilities owed by the individual
Is value of net worth always positive?
could also be negative based on the adequacy of savings versus projected needs
Life insurance benefit/ face amount
the future payout - may be a lump sum or annuity
life insurance cash value
what an owner can withdraw before payout, which reduces or terminates final payout
life insurance paid up
a date when the insurance is fully paid for and no additional premiums are required
life insurance contestability period
time period of the insurance company to investigate or deny payment of the claim
life insurance riders
additional provisions included in the policy
temporary (term) insurance
covers only a designated period such as 1, 5 or 20 years
- cost can be fixed or increasing over the period
- policy ceases at the end of the period unless it includes a provision to renew
- less costly than permanent because mortality risk is lower for insurance company as risk of dying increases later in life.
- term insurance for younger people or for shorter time period costs less
permanent insurance
more costly, lasts for the life of the insured
- premium per period is fixed
- policy builds value as the premium exceeds the pure cost of insurance in the initial years. in later years, this built up value covers the increasing cost that would be paid for pure term insurance. permanent insurance can be whole life or universal insurance.
whole life insurance
- typically fixed premium payment
- policy continues and cant be canceled by the insurance company as long as premiums are paid
- may reach fully paid status in later years and require no further premiums
- participating whole life shares in company profits and may increase in value more quickly
universal life insurance
- similar to whole life insurance, but more flexible
- premium payment can be increased or decreased or decrease amount of insurance and/or the rate at which cash value grows
- there may be investment choices for where the premiums are invested
- premium payments can be discounted and the insurance continues as long as the cash value and earnings on cash value are sufficient to pay the pure cost of insurance each period
Gross Premium of life insurance
load + net premium
insurance load
company’s operating cost and expenses for writing the policy, can include a sales commission to sell the policy and cost of any medical tests to determine insurability
Annuity
one time premium payout in exchange for fixed payouts received for the life of the annuitant
Deferred variable annuity
allow the owner to select from a list of investment options. higher/ lower returns will increase or decrease the future payouts received.
Advanced life deferred annuity
- lower cost way to hedge the longevity risk of the annuitants outliving their other assets.
- require immediate premium payout at purchase
- payouts are fixed but the delay period before they start is long, often age 80 to 85 for the annuitant.
- low premium reflects these factors
Immediate variable annuities
start payouts immediately, but the amount of future payouts is indexed to the performance of some reference asset, such as stock index. as the reference price increases or decreases, the payouts increase or decrease.
immediate fixed annuity
begin payout immediately and payout amount does not change
will 60 year old male receive higher annuity or 60 year old female
male as females live longer and the total payouts made for the female by the company will be higher
60 year old male or 80 year old male - who has higher annuity?
80 year old male because life expectancy is shorter, so less payouts
A rider specifying payouts to be made for at least 10 years versus no rider
rider reduces payout because higher cost to the insurance company - it no longer benefits from cessation of payouts to annuitants that live less than 10 years
how do future market expectations of interest rates impact annuity decision?
payouts on fixed annuity are largely determined by initial bond interest rates. if rates are expected to icnrese, delay in purchase can lead to higher payouts on annuities purchased later.
fees for variable annuities
tend to be higher. they are more complex and difficult to analyze. this difficulty tends to reduce price competition and further increase the price of variable annuities - ie lowers the annual payout received for premium invested compared to fixed annuities.
self insurance of longevity risk
invest in financial assets and set a withdrawal amount that lasts to an assumed life expectancy
an individual in higher risk HC will choose?
lower risk FC
