Text of Lesson 20FIN 403 Review Assignment: Due Monday December 5 th
Lesson 20FIN 403 Review Assignment: Due Monday December 5 th
The Principal Types of Life Insurance Term life policies are pure life insurance policies without savings/investment features. Whole life and Universal Life policies have savings and/or investment features.
Term Life is plain life insurance without a savings component. It pays the face value to the beneficiaries if the insured dies before the expiry date (within the term). Question. If the insured does not die within the term, was the policy a waste of money? Why or why not? Answer. No. The owner/insured protected the risk to the family.
Participating term policy: one on which the insurance company will make investments on behalf of the insured/owner and pay back the insured/owner each year, an amount of money called dividends. Non participating term policy: does not pay dividends. The difference in cost is that a participating term policy is more expensive. However, if the investments earn a profit, the cost of the policy is reduced. The Net Premium of a participating term policy is the premium (cost of the policy) less the dividend (profit from the investment).
Level Term Insurance: The face value of the policy stays the same throughout the term of the insurance contract. Decreasing term insurance: The face value decreases as the policy approaches expiry. Decreasing term insurance is useful for home owners that have a mortgage. Question. Which is more expensive? Why? Which is more useful? Answer. There are many correct answers.
Term policies and renewability. If the policy holder/insured/owner does not pay the premium on time, the policy will be void (not good). Some policies give a time frame of 30 days but not all. If the premium is paid on time, the policy remains in effect and good for the entire term. During the term, there is no need to have another medical examination.
Question. What does the premium depend on? Answer. The premium depends on the likelihood of the insured dying. Question. How do the insurance companies know the likelihood of a person dying? Answer. Mortality tables report the historical death rates of various groups of people according to specific characteristics, such as age, smoking addition, sex, occupation, etc.
Page 586 of your Textbook Standard Mortality Tables. Read page 586. 1.A 1990 study in China, to do with demographic measurements http://files.campus.edublogs.org/hsblogs.stanford. edu/dist/1/35/files/2011/02/35.pdf http://files.campus.edublogs.org/hsblogs.stanford. edu/dist/1/35/files/2011/02/35.pdf 2.Flexible Use of Mortality Tables in China http://www.actuaries.org.hk/upload/File/ET040420.pdf
http://english.peopledaily.com.cn/200512/23/eng20051223_230332.html Revised life insurance mortality table to take effect next year The revised China Life Insurance Mortality table, a statistical table showing probable death rates in each age group, will take effect from Jan. 1, 2006, the China Insurance Regulatory Commission (CIRC) announced. China released the first such life insurance table in 1995. The CIRC began compiling statistics for the new table from insurance records in August 2003. The revised table is split into non-pension business and pension business. It shows the average life span for men who buy non-pension products is 76.7 years, and for women 80.9 years, both up 3.1 years from 1995. In the pension business, these two figures are 79.7 for men and 83.7 for women, an increase of 4.8 years and 4.7 years respectively, according China Daily. Based on the new table, the price of safeguard-oriented products, such as fixed-time life insurance policies, would fall, said Chen Wenhui, director of the life insurance regulatory department at the CIRC. The price of savings-oriented products that are seldom affected by mortality rates will see very little change. For life-long pension products, the price will maintain its upward trend, as insurers have to pay more as people live longer, he said. Source: Xinhua
Bonus home work Read the article in detail and tell the class, in one minute or less, 1.The reason that the price of savings-oriented products are seldom affected by mortality rates (meaning that the price will see very little change as Chinese people live longer). 2.Tell us why the price of life-long pension products will maintain its upward trend. If you are going to present this to the class, arrive five minutes early so that I can ensure that we can make time for you to do the presentation.
Smoking Attributable Deaths
Question. Why are smokers either uninsurable or so very expensive to insure that it is to expensive and most people can not afford a policy? Answers for life, health and disability insurance. Probability of dying earlier means that more payouts per insured person. Requires higher rates and lower face value. It raised the cost of insurance for all people. Health insurance, private or government, will be very expensive. Like the example for unemployment insurance being nationalized and not private, many insurance companies are no longer selling insurance policies to smokers.
Question. What else affects the premium (price) of live insurance? Answer. 1. Age. Older people are more likely to die than young people. 2. Gender. Men die younger than women. 3. Specific health conditions. Smokers die much. younger than non-smokers. 4. Cost of selling and administering the policy. 5. The ability of potential insured person to choose policies beneficial to them. 6. Duration of the policy.
Question. How does an insurance company minimize its losses by avoiding selling to people who are sick and likely to die sooner rather than later? Answer. Screening. Many health tests. Question. Is this fair or an infringement on human rights? Answer. It depends in which country you live and the philosophical view of human rights. In the USA, business will argue that it is the right of businesses/ insurance companies to know the truth before insuring a person. Non smokers won the privilege to not have their premiums inflated/raised because smokers are dying earlier. Question. Is it fair that national health insurance is the same price for all Canadians, even smokers and bad drivers (cars/motorcycles, etc) when the cost of providing health care for their illness or injuries is so much more expensive, and is avoidable? Answer. You know what I think!
In class exercise Calculate the amount of insurance recommended, for each of these examples, using the Income Approach. See the next slide.
The value of an insurance policy to replace 1. $100,000 Canadian Dollar income at 3.5% interest for 20 years, to retirement. 2. 100,000 Chinese RMB income at 3.5% interest for 15 years, to retirement. 3. $60,000 income at 4% interest for 10 years, to retirement.
Questions about renewing term insurance Questions from the previous page, 1.What are the considerations for renewing the insurance policies? Children may be grown and independent Spouse may be employed Spouse may be disabled or with long term illness Policy owner may be unemployed and unable to afford to pay insurance Policy owner may have more or fewer obligations and need to insure for more or less than the last policy 2.What might affect the renewal rate for each individual? Policy owner may have developed a disease Policy owner may have quit smoking for more than one year Policy owner may have moved to a dangerous neighborhood
Useful Information Question. Why will the premium for a one year policy be less than the premium for the same person purchasing a 10 year policy? Answer. Because the company has only one year of risk to assume, versus 10 years. If the person is in good health at the beginning of the policy and gets sick in two years, the company holding the 10 year policy is more likely to have to pay. A 10 year policy will carry higher annual premiums than a series of one year policies.
Group Term Insurance Question. What is the primary feature of Group term insurance? It is usually provided by an employer. Question. What are the advantages of group term insurance? a)Renewable every year without further medical testing b)Less expensive to administer by the insurance company What are the disadvantage of group term insurance? Adverse Selection. Everybody pays the same premium, whether healthy or not. If the employee pays 50% of the premium and I am very healthy, I might get a better deal if I purchased my insurance privately, but opting out is not usually an option.
Question. Is group insurance less expensive or more expensive than individual policies? Answer. More expensive, because insurance companies must set the price higher to compensate for the Adverse Selection (healthy and unhealthy). Additionally, they can not usually exclude a person from the group policy unless the person has pre- existing health condition.
Summary: Term Insurance Term life insurance. Protection for a specified period of time. If you stop paying premiums, coverage stops. Renewability: You can renew the policy without having a physical at the end of the term. Conversion option: Can excha