LIFE INSURANCE

PRODUCTS

Type of Life Insurance

Whole Life Insurance
Term Insurance
Pure Endowment
Insurance
Endowment Insurance
Immediate Annuity
Deferred Annuity

Whole Life Assurance

Contract
Death
Benefit

Pay benefit on the death of the life insured

Pays when the insured die

Surrender Typically, surrender value would be available

Value
Bonus

Bonus is available for with profit contract

Risk

Mortality risk, anti-selection risk

Providing for funeral expenses

Advantages Meeting any liability to tax (e.g. inheritance tax or death duties)

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 substandard 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

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

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

Endowment
Assurance
Discussion 1:

How do you think endowment assurance could be more attractive

means of transferring wealth then a non-insured saving method?

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 assured
ii. Value of units
iii. Some percentage (120% of the value of unit)

Endowment
Assurance
Discussion 2:

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?

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 contract
ii. The frequency of payment of the premium
iii. The relationship of the pricing and supervisory reserving bases
iv. The level of initial expenses (including commission)

Immediate Annuity
Contract

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
Contract

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

Death
Benefit

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

Surrender Typically, surrender value are not available

Value
Bonus

Bonus is available for with profit contract

Risk

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

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

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.

Index-linked
Examples
Index-linked annuity
An 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 bond
Usually 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.

Risk of the Product to the

Insured
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