LIFE INSURANCE PRODUCTS

Type of Life Insurance

Whole Life Insurance

Term Insurance

Pure Endowment Insurance

Endowment Insurance

Immediate Annuity

Deferred Annuity

Whole Life Assurance

• Pay benefit on the death of the life insuredContract

• Pays when the insured dieDeath Benefit

• Typically, surrender value would be availableSurrender Value

• Bonus is available for with profit contractBonus

• Mortality risk, anti-selection riskRisk

• Providing for funeral expenses• Meeting any liability to tax (e.g. inheritance tax or death duties)Advantages

Mortality Risk

• Mortality risk depends on the age at the entry and the duration in force of the contract.

• May also arise from selective withdrawals where the policyholders most likely to withdraw the contracts are in good health leaving the insurance company with sub- standard group of lives.

Anti-selection Risk

• The risk is that those who take out the policies are the one who ‘expect’ to have heavier than average mortality.

• Without underwriting, the insurance company would suffer earlier claims on average resulting lower profit.

Whole Life Assurance

• Without-profits contract offer a guaranteed sum assured on death

• With-profits contract, the initial benefit may be increased by cash bonuses or cash refunds.

Capital Requirement of a Contract

Capital requirement of the contract will depends on:

• design of the contract

• The frequency of payment of the premium

• The relationship of the pricing and supervisory reserving bases

• The level of initial expenses (including commission)

Term Assurance

Contract • Pay benefit on the death of the life insured within the term of the contract.

Death Benefit • Usually lump-sum is paid when the insured die within the term.

Surrender Value • Typically, NO surrender value would be available

Bonus • Bonus is available for with profit contract

Risk • Mortality risk, anti-selection risk

Advantages • Provides protection for dependents at lower cost than whole life and endowment assurance

Term Assurance

• Group term assurance contracts can be used by employer to provide benefit to dependents on the death, whilst in employment of an employee.

• It can also be used by credit card company to provide benefit on death equals to balance outstanding on a credit card.

Convertible Term Assurance

Contract • Pay benefit on the death of the life insured within the term and available for renewal.

Death Benefit • Usually lump-sum is paid when the insured die within the term.

Surrender Value • Typically, NO surrender value would be available pre-conversion

Bonus • Bonus is available for with profit contract

Risk • Mortality risk, anti-selection risk

Advantages • Provides protection for dependents at lower cost than whole life and endowment assurance

Convertible Term Assurance

• Convertible term assurance is a term assurance with the option to renew at the end of the original contract.

• The appeal for this contract is, the renewable can be made without further medical underwriting (in South Africa, some renewable contract allow for AIDS test) unless benefits are increased

• It allows policyholders to convert to any type of contract such as endowment or whole life assurance or renew the original contract for further period of years.

• Surrender value would not be paid pre-conversion.

Endowment Assurance

Contract • Pay benefit on survival to a known date (n years/maturity)

Death Benefit • Pays when insured die within n years. (No death benefit for pure endowment insurance if die before maturity.

Surrender Value • Typically, surrender value would be available

Bonus • Bonus is available for with profit contract

Risk • Mortality risk, anti-selection risk, expense risk, mortality risk from selective withdrawals

Advantages• Operates as saving vehicle (e.g. pays lump-sum at retirement or means of

repaying capital on interest only loan )• Providing protection for dependents

Endowment Assurance

How do you think endowment assurance could be more attractive means of transferring wealth then a non-insured saving method?

Discussion 1:

Endowment Assurance

Without-Profits Endowment Assurance

• Offers a guaranteed sum assured at the end of the contract in exchange for a single premium at the start of the contract or a series of regular premium throughout the contract.

• If the policyholders die before the contract term end, then usually the same sum assured is paid on death. However the contract could be structured with the sum assured paid on the death to be different then the sum assured paid on maturity.

Endowment Insurance

With-Profits Endowment Insurance

• Conventional with-profits contract has similar structure to without-profits contract; except that the initial sum assured is expected to be enhanced by declaration of bonuses to the policyholders.

• Bonuses can be in the form of additional benefits, cash bonuses or reduction of future premiums

Endowment Insurance

Unit-linked

• Unit-linked contract operates by paying policyholders premium into pooled investment funds.

• The benefits payable at maturity depends on the performance of the underlying asset and the level of charges levied by the insurance company

• The benefit on death might be i. Fixed sum assuredii. Value of unitsiii. Some percentage (120% of the value of unit)

Endowment Assurance

A conventional with-profit endowment and a without-profits endowment both have an initial sum assured of $10,000. With all other things being equal, which will have higher premiums? Why?

Discussion 2:

Endowment Assurance

• Group endowment insurance contracts enable employer to provide benefits at retirement or on death in service in respect of his employees.

• The group contract adds no additional risk. Anti-selection risk is likely to be reduced particularly if it is compulsory for all eligible members to join the group.

• Capital requirement of the contract will depends on:i. The design of the contractii. The frequency of payment of the premiumiii. The relationship of the pricing and supervisory reserving basesiv. The level of initial expenses (including commission)

Immediate Annuity Contract

Contract• A contract to payout regular amount of benefit provided the life insured is

alive at time of payment. Payment maybe made in advance or in arrears.• Maybe purchase as single or joint life first death, or last survivor

Death Benefit • Some of annuities pays whether the life insured survive or die, or received balance of the paid premium.

Surrender Value • Typically, surrender value are not available

Bonus • Bonus is available for with profit contract

Risk • Longevity risk, anti-selection risk, investment risk, expense risk, withdrawal risk

Advantages• Provide regular benefit payments. To protect the level of their future income.• May proceed from other contract (e.g. endowment insurance)• The main purpose is to convert capital into lifetime income. (e.g. pension)

Immediate Annuity

• When an annuity has last survivor benefit, the level of payment may reduce after the first death.

• A group version of the contract can be used by employer to fund for employees at or after retirement.

Deferred Annuity Contract• A contract to payout regular amount of benefit provided the life insured is alive at the end of the deferred period

when payment commence and subsequently alive at the time of payment. Payment maybe made in advance or in arrears.

• Maybe purchase as single or joint life first death, or last survivor

Contract

• Some of annuities pays whether the life insured survive or die, or received balance of the paid premium.Death Benefit

• Typically, surrender value are not availableSurrender Value

• Bonus is available for with profit contractBonus

• Mortality risk, anti-selection risk, expense risk, mortality risk from selective withdrawals Risk

• Provide regular benefit payments. To protect the level of their future income.• May proceed from other contract (e.g. endowment insurance)• The main purpose is to convert capital into lifetime income. (e.g. pension)

Advantages

Index-linked

• index-linked contracts provide benefits that are guaranteed to move in line with the performance of an index specified in the contract.

• Suitable investment indices might be the major domestic equity market indices of any country, or more broadly based international equity indices.

• Links might also be made to other asset classes such as fixed interest.

• Typical economic indices that might be used include retail or other appropriate price indices.

• Linking benefits to a retail price index, for example, promises the consumer a benefit that moves exactly in line with retail price inflation.

Examples

Index-linked annuityAn annuity paid for the lifetime of the policyholder whose regular payment moves in proportion to a published index of prices or earnings. It is paid for by a single premium, or it may be in the form of a deferred annuity paid for by regular premiums during deferment. In this case the premiums may or may not be linked to the same index. The company will take its margins for expenses, mortality and profit in the rates it offers for conversion from the premium to the initial level of annuity.

Index-linked investment bondUsually a single premium is paid. The contract guarantees to pay the value of the single premium, increased in line with a published investment index, at a given future maturity date or on earlier death. Early surrender may be possible. The company takes its margins for expenses, mortality and profit from the difference between the investment return obtained by the company and the return determined by the progress of the index over the period.

Index-linked

Conventional without-profits• the amount of benefit provided – that being fixed and guaranteed – eventually turns out to be insufficient.• the insurer becomes insolvent and unable to meet the guaranteed benefits in full.• inflexibility of the product to keep pace with the changing disposable income of the policyholder, and the

changing amounts of benefit needed throughout the financial life cycle.• the policyholder is exposed to the risk of being unable to maintain premiums due to accident, sickness,

redundancy, or other loss of income

With-profits• With-profits contract can provide some protection against the ultimate benefits being eroded by inflation

to the extent that the policyholder does not also choose to reduce the guaranteed level of benefit in anticipation of the future value of surpluses which he might enjoy

• the policyholder still carries some risk of insurer insolvency, although this should be less than under a conventional without-profits contract to the extent that future surpluses can now be used to maintain solvency, before being distributed to policyholders

Risk of the Product to the Insured