Topic 2 Flashcards
Term Assurance
Provides a benefit on death of the insured life within the specified term of the contract
Also provides protection against financial loss for the dependents on the death of the insured
Why might an individual choose to purchase a decreasing term assurance rather than a level term assurance?
To cover the balance outstanding on a repayment mortgage
Group term assurance
Used by an employer to provide a benefit to dependents on the death of an employee
A group term assurance contract usually has a term of one year and are renewed annually. Why?
Changes in the workforce ( employee turnover ) means that the number/ mix of lives covered and/or benefits levels payable can change significantly from year to year
What is the difference between critical illness and terminal illness ?
Terminal illness - death is likely within 12 months
Critical illness- recovery is unlikely , but death need not be imminent
Versions of term assurance
Level term assurance
Increasing term assurance
Decreasing term assurance ( sum assured doesn’t decrease linearly )
Why doesn’t the sum assured decrease linearly ?
The outstanding balance on a repayment mortgage doesn’t decrease linearly. It decreases slowly at first ( as repayment is mainly interest) then faster as the duration increases.
Features of a term assurance
Waiver or premium - insured is ill and unable to work , premiums will cease but cover will continue @ same level.
Guaranteed & reviewable premiums . P/holder purchasing cover for guaranteed premium pays higher premium than one with cover for reviewed. Advantages of pricing structure of a reviewable premium?
The lower initial premium increases marketability
Premiums can be reviewed to reflect future changes in experience
Term assurance contracts are NON-PROFIT in nature . Why?
It is a protection contract and therefore the stability of the benefit is more important to the policyholder than sharing in investment returns
It is cheap, which means low premium , therefore low fund built up and thus little scope for significant investment profit .
Risks associated with term assurance
Mortality Risk- if more p/holders die within the terms of the contracts than anticipated, then the company will make a loss - early stages of the contract
Anti- selection Risk- mainly affects individual term assurance contracts since individuals -poor health-purchase term assurance contracts
Group term ; if membership is compulsory, less scope for individual selection - group includes a mix of healthy & sick lives.
Selective withdrawal
Healthy lives- more likely to withdraw leaving a below-average mortality experience
Control of this risk; paying zero surrender value on withdrawal
Expense risk
Actual expenses incurred in product administration > expected due to higher than expected expense inflation & lower business volumes
Withdrawal risk
Financial loss can occur if withdrawals happen when asset share is negative , especially @ early durations ( high commissions and underwriting costs )
Withdrawal risk can be an issue during later stages of a decreasing term assurance . Why?
Level premiums and decreasing benefit - negative reserves @ later durations .
P/holders will lapse since the premiums exceed the cost of cover.
Control of withdrawal risk
Limiting the premium paying term
Convertible Term Assurance
P/holder can convert to another type of contract ( whole life or endowment ) on maturity or other specified date.
Renewable term assurance
P/holder has option to renew cover on standard terms at maturity without further underwriting
Immediate annuity
Contract to pay our benefit installments at regular intervals provided the p/holder is alive to receive the payment
Reasons for purchasing a immediate annuity
Provide a guaranteed income in retirement
Transfer longevity risk to the insurance company
Benefit payment of a immediate annuity
Level
Variable
Increased at a fixed rate over time
Increased in line with an index eg price inflation
No surrender value on immediate annuity why ?
Risk of anti- selection will be high , those in poor health will prefer to take the surrender value , leaving those in better health , thus increased longevity risk .
Advantage and disadvantage of a with- profit and/ or unit-linked immediate annuity compared with a non- profit?
Advantage: the p/holder shares in the investment profit , so should receive a higher level of income over time
Disadvantage: more complicated; income levels can fall over time of investment returns are poor ; thus more risky
Longevity risk
P/holder lives longer than expected , company makes a loss
Anti - selection risk
Lives who choose to purchase immediate annuities may feel that they are in above- average health .
Selective withdrawal
Lives in below- average health withdraw ,‘leaving a group of lives in above- average health , who can be expected to live longer , on average .
No surrender value
What is income drawdown?
Alternative to immediate annuity at retirement
Fund is invested and income deducted each year as required ( within specified limits)
Advantages of income drawdown
Flexibility- income can be taken each year to reflect need
Can benefit directly form investment returns
May be tax efficient, typically for higher earners s
Disadvantages of income drawdown
Annuity prices rise by age 75
Investment returns could be poor
More complicated to manage
Increased longevity risk is fund is withdrawn faster .
Higher charges
Variable Annuity
Provide income in retirement , whilst allowing the holder to benefit from the investment performance of underlying assets
Deferred Annuity
P/holder pays regular premiums during the deferred period and receives regular amounts of benefit payable from end of the deferred period provided the p/holder is alive at time of each payment .
Advantages of saving for retirement using a deferred annuity rather than an endowment assurance plus an immediate annuity?
Conversion rates are known
May be cheaper ( one contract instead of two, thus saving on commission)
Disadvantages ( previous question)
Likely to be more expensive ( due to implicit guarantees that have to be charged for)
Lack in flexibility with regard to timing of retirement, taking lump sum on retirement
