Chapter 7: LIFE INSURANCE
Life Insurance Products
1. Pure Endowment and Endowment Assurance
2. Whole Life Assurance
3. Term Life Assurance
4. Convertible and Renewable Term Assurance
5. Immediate Annuity
6. Deferred Annuity
7. Income Protection
8. Critical Illness
9. Long term care
Pure Endowment and Endowment Assurance
Pure Endowment & Endowment Assurance
Retirement
Loan repayment
Endowment
Transfers wealth from parents to children
Protection for spouse/ dependents
Group Version: Employer giving benefits to employees [as part of remuneration package]
(For retirement or death in service)
o Time consuming
o Admin Costs (for recording and storing)
o Transfer Costs
o High surrender of policy (if employees leave the job)
Whole Life
Long term
Funeral Expenses
Inheritance Tax
Estate duties (tax on property inheritances)
Premium payment would be for a selected term period / or till a particular age
Paid up Policy option (reduced sum assured if premium payments are ceased before term)
Paid-up additional insurance is available as a type of whole life insurance rider. It lets p/h increase the
policy’s living benefit & its death benefit by increasing the policy’s cash value.
[Advantages: Paid up additions are tax deferred + no further medical underwriting is done]
E.g. a 35 year old purchases a policy with an annual base premium of $4,000. This premium purchases
$200,000 of death benefit. This individual decides to pay an extra $6,000 into a paid up additions rider in
the first year. The paid up additions will give him an immediate cash value of $6,000, & add $30,000 to his
death benefit. He ends up paying $10,000, with $6,000 going to cash value, and a total death benefit of
$230,000.
Group Version: Not available
Term Assurance
In case of individual: Protection for Dependents
In case of Corporate / Partnership: Protection in case of death of key person in organization
(Loss of important contracts & contacts, cost of delay in major project,
cost of recruiting a suitable replacement)
Decreasing T.A. :
Repayment of balance outstanding under a loan
Provide income to children until children can earn themselves
No surrender value because:
There would be selective withdrawals if surrender value is given i.e. individuals who
believe they are ‘healthy’ will surrender in-between, & company would have individuals
who have a higher probability of death.
These contracts have a low premium and low provisions, hence little scope for making
surrender payments
Group Version:
Employer and Employee
Credit card Company & credit card holder: Insurance company indemnifies the credit
card company against a loss when the credit balance is not repaid because of death of
credit card holder (Benefit on death = balance outstanding on a credit card)
Supplier of goods & Purchaser of goods: Outstanding payments of goods
Variations in level & form of benefits relating to TA product:
Variations in amount of Sum assured:
o Benefit linked to index
o Benefits on decreasing rate (mortgage related insurance)
o Benefits on increasing rates (provide for dependents in the future)
Additional rider benefits (e.g. critical illness – cheaper than regular cover)
Waiver of premium benefit (e.g. in case of sickness, accident, unemployment): Because of temporary
loss of income, and possibility of not being able to pay premiums
Premium reviewable in few years (guaranteed / non-guaranteed rates)
Option to renew w/o underwriting
Option to convert to Whole life / Endowment w/o underwriting
Rating Factors to consider for TA
Age of individual
Sex of individual: Female Mortality is lower
BMI: Ideal BMI is between 19 and 24. Individuals who have a BMI of over 30 (obese) should be treated
as high risk individuals
Smoker / Non smoker
Consumption of alcohol
Drug usage: Increases mortality rates
Health of individual (whether suffering from heart conditions, high blood pressure etc.)
Marital status: Marital men are supposed to have lower mortality risks
Lifestyle activities: Individual participating in any extreme sporting events
Usage of health club memberships (gym facilities)
Medical underwriting: Tracking previous individual medical history / family medical history
Geographical location: rural vs. urban / inner city vs. suburbs
Occupation e.g. industrial workers working in extreme conditions have high chances of early mortality
Socio Economic Status: (capacity to get expensive private health treatments)
Any previous TA insurance products bought
Other factors to consider for TA products
Demographic trends
Regulation: Regarding restrictions on underwriting procedures
Competition
Risks covered
Term of the product
Reinsurer support
Target market
Expected business volumes (to know about coverage of overhead expenses)
Distribution channels
Data source: Internal data / Reinsurer data
Underwriting process
Customer communication (customer understanding terms of the policy)
Staff training & technological advancement
Convertible or Renewable Term Assurance
Convertible Pros Convertible Cons
Can be converted to permanent insurance Higher annual premium due to conversion to
Amount of coverage remains the same permanent insurance and / or due to higher mortality
rates at older ages
Annual option to convert May not have a converting option in term assurance
Renewable Pros Renewable Cons
Lowest Cost Premium might go up with each renewal
Amount of coverage remains the same Change in health status may rise renewal rate
Can be renewed for additional terms May not allow renewal for more than one term
Group Version: Individual who has been member of group TA, (during employment) may at retirement be
given a continuation option to continue as an individual TA policy.
Immediate Annuity
Provides GUARANTEED income no matter how long individual lives
Investment, reinvestment and longevity risks are passed on to the insurer
Annuity terms fixed at outset (hence p/h is not concerned about investment conditions)
P/h can discontinue policy within a cooling off period. After termination of the period, the individual
cannot apply for withdrawal. Hence liquidity risk lies with the policy holder.
There might be tax / regulatory advantages
Mostly without-profit or index-linked
With Profit: P/h gets guaranteed amount + bonus
Unit linked: Annuity provider guarantees a fixed number of units to the p/h.
Value of annuity =
Number of units * Unit price (and unit price varies on daily basis)
Impaired Life Annuities: Higher annuity benefits to individuals who are ‘impaired’ (having an expectation of
shorter lifetime)
Group Version: can be used by employer to fund for pensions for his employees
Deferred Annuity
Paying regular premiums up-to a specified ‘vesting date’ or a single premium
At the vesting date, p/h can get regular annuities or alternatively a cash lump sum (this option is known as
“cash option”)
Group Version: can be used by employer particularly when employer closes an occupational pension
scheme
Critical Illness
Some categories covered: Heart disease, cancer, stroke, organ transplant, kidney failure
No surrender value (except in case of unit linked form of policy)
Three types:
Stand Alone
Rider (additional benefit): benefit paid either on death / critical ill or on both
Claims acceleration: benefit paid on whichever occurs first (death or illness)
Group Version: Can be used by employer to provide financial help in case of critical illness.
Income Protection
Provides income in case of occurrence of risk event insured
P/h is unable to work in his/ her own profession or in any profession
Risk event includes mainly:
Long term sickness
Incapacity to work due to accident / illness
Risk event may include:
Unemployment
Birth of handicapped child (hence, requiring large healthcare benefits)
Group Version: Can be used by employer to provide company sick pay scheme.
Can be used by state as a state sick pay scheme.
Long term care
Costs of care paid as:
Indemnity (all future costs of care)
Cash lump sum
Annuity
Claim made, when p/h has reached a specific level of disability and can’t perform Activities of Daily living
(ADLs)
Cost of care (in increasing order)
own home
residential home (non-nursing)
residential home (nursing)
Premiums can be paid regularly or in a single premium
Contract can be without profit, with profit or unit linked
Group Version: Can be used by employer to provide cover for employees, spouses & parents
Can also be used by Continuing Care Retirement Communities (CCRCs)
--------------------------------------------------------------------------------------------------------------------------
Without Profit
Guaranteed benefits (fixed)
Calculation Method for obtaining benefits (fixed)
Protection Based
Less Risky
Non-discretionary (however, surrender values may be discretionary)
With Profit
Insurer and p/h share profits (and hence risk)
Bonuses (Regular & Terminal)
Saving Based
More Risky
When setting bonus levels four factors are important:
Smoothing of Profits
PREs
Competitors
Regulation
Unit Linked
Savings + Protection based [Flexibility exists]
Risk is variable
Benefit on Death may be:
Fixed Sum % of Value of Units (e.g. 120 %)
Value of Units Max(value of units, Sum Assured)
Profit for Insurer:
(Exp. Charges – Actual Exp.) + (Mortality Charges – Cost of guaranteed death benefit)
KEY RISK FOR INSURER: Charges don’t match expenses/ cost of guarantee in terms of nature, timing and
amount
Surrender value may be simply value of units
Allocated Premium Unit Fund (Policyholder’s Fund)
less bid-offer spread
Fund Management Charge
Admin Charge
Premiums Mortality change Charge
Unallocated Premium Non unit Fund (Insurer’s Fund)
Bid-offer spread
Actual Expenses
Cost of providing guaranteed benefit
With Profit vs. Unit Linked
ALL investment risk lies with p/h in unit linked; not in with profit because:
1. There is guaranteed element in with profit contracts
2. Company would like to meet PRE’s in with profit contracts
3. Company would like to have profits for shareholders sake (some part of surplus can go to p/h)
Index Linked
Benefit in line with an index
Premiums may be fixed in monetary terms or move in line with the same index.
Investment indices: Equity mkt. indices (domestic & international)
Economic indices: price indices (retail price inflation, consumer price inflation)
Group assurances
Removes mortality risk (as individuals of different mortality rates cancel each other out)
Gives more predictability to cost of death benefits (law of large numbers)
Reduces volatility of amount and timing of death in service costs
Gets rid of liquidity constraints