Lesson 20 FIN 403Review Assignment: Due Monday December 5th

The Principal Types of Life InsuranceTerm 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 TextbookStandard 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

2. Flexible Use of Mortality Tables in Chinahttp://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 workRead 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 exerciseCalculate 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 replace1. $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 InformationQuestion. 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 InsuranceQuestion. 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 testingb) Less expensive to administer by the insurance companyWhat 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 exchange term policy for whole life policy

without having a physical. Decreasing term insurance: Premium stays the same, but the

amount of coverage decreases as you age – mortgage insurance.

Life Insurance with Savings/Investment FeaturesWhole Life Insurance

Whole life insurance - Also called straight life. You pay a premium as long as you live. Amount of premium depends on your age when you start

the policy. Provides death benefits and accumulates a cash value. You can borrow against the cash value or draw it out at

retirement. Look carefully at the rate of return your money earns.

Whole Life Policy OptionsLimited payment policy.

Pay premiums for a stipulated period, usually 20 or 30 years, or until you reach a specified age (65).

Your policy then becomes “paid up” and you remain insured for life.

Variable life policy. Minimum death benefit guaranteed, but the death benefit

can be greater than the minimum depending on earnings of the dollars invested in a separate stock or bond fund.

Whole Life Policy OptionsAdjustable life policy.

Whole life insurance policy, but you can change your policy as your needs change. You can change your premium payments to increase or decrease coverage.

Universal life - gives you more direct control. Can pay premiums at any time in almost any amount.

Amount of insurance can be changed more easily than a traditional policy.

The increase in the cash value of the policy reflects the interest earned on short-term investments.

Other Types of Life Insurance Policies

Credit life insurance.– Debts such as car loan is paid off if you die.– Also protects lenders.– Expensive protection.

Life Insurance Contract ProvisionsQuestion. How many contract provisions can you

name and explain? Do it now… Naming your beneficiary, and contingent

beneficiaries. Length of grace period for late payments. Reinstatement of a lapsed policy if it has not been

turned in for cash. Nonforfeiture: Keep accrued benefits if you drop

the policy. Incontestability clause: After the policy has been in

force for awhile (2 years), the company can’t dispute its validity for any reason.

Suicide clause during first two years.

Life Insurance Contract Provisions Automatic premium loans.

– Uses the accumulated cash value to pay the premium if you do not pay it during the grace period.

Misstatement of age provision. Policy loan provision to borrow against cash value. A rider to a policy modifies the coverage by adding

or excluding conditions or altering benefits.– Diamond ring– Expensive computers and electronics– Expensive garden equipment

Life Insurance Contract Provisions Waiver of premium disability benefit. Accidental death benefit - double indemnity. Guaranteed insurability option. Cost of living protection. Accelerated benefits, also called living benefits, pay to

those who are terminally ill before they die. Second-to-die option, also called survivorship, insures

two lives.

Buying Life Insurance Look at your present and future sources of income,

other savings and income protection, group life insurance, pension benefits, and Social Security benefits (government pensions).

Determine the insurance companies that you can purchase a policy from.– Examine both private and public sources.– Look up the company’s rating, in A. M. Best or other rating agencies.– Talk to friends or colleagues.– Research ratings on the web, www.standardandpoor.com.

Obtaining and Examining a Policy1) Apply.2) Provide medical history.3) Usually no physical for a group policy.4) Read every word of the contract (fine print)Do not be rushed. Do not read it at the desk when you

asked to sign.5) After you buy it, you have ten days to change your mind.6) Give your beneficiaries and lawyer a photocopy.

Financial Planning with Annuities Annuity: Financial contract written by an insurance

company that provides you with a regular income. People buy annuities to supplement retirement

income and to shelter income from taxes. Those who expect to live longer than average

benefit most from annuities. Annuities are tax-deferred investment plans. You

pay taxes on the interest when you draw the money out.