Transcript Economics of Life and Health Insurance

Term life insurance and
endowment insurance
Richard MacMinn
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Monday, July 20, 2015
Copyright MacMinn.org
Objectives
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Consider the competitive pressures facing life
insurers
Consider how life insurers are responding to
competitive pressures through product design and
distribution
Define term and endowment life insurance
Describe the features of term life insurance
Describe and explain endowment life insurance
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The changing face of financial services
markets
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Factors contributing to change
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International growth of life markets
Confluence of economic, cultural, demographic
and technological factors
Convergence in financial services
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Insurance company reactions
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Potentially lower cost coverage
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Increased flexibility
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Indeterminate premium plans
More refined classification systems
Provisions to encourage persistency
Face value may be changed at any time
Increased flexibility in premium payment
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Insurance company reactions
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Greater disclosure
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Increased risk to consumers
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The disclosure of the elements of the policy, i.e. how much
of the premium goes to mortality and expenses versus cash
buildup
The transparency extends to annual transaction summaries
that allows the policyholder to monitor the financial results
and compare to policy illustration at time of purchase
Price competition has motivated insurers to offer less liberal
guarantees and shift more risk to the consumer, e.g., in
variable life and annuity products
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Types of life insurance
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Term life
Endowment
Whole life
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Term life
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Nature of term life
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Renewability
Convertibility
Reentry
Quotes
Limitations of term life
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Benefits
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Costs
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Indemnity cost is lower
Flexible and transparent
It does not provide a savings instrument
There is a renewal risk at term
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Types of term life
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Level face value
Increasing term is equivalent to
renewable term. Note the
– Increasing premium
classification and YRT rates in table
– Level premium
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 Life expectancy term
The life expectancy term provides
 Term to age 65
protection
the life
expectancy
of
The family for
income
policy
is a
the insured term
giventhat
ageprovides
and sex.a
decreasing
 Non-level face value
The
levelincome
premium
monthly
to agenerates
surviving a
– Types
cash
increases
spouse
untilwhich
a certain
orand
for
a to
Thevalue
payor
benefit
is age
usually
a rider
 Mortgage protection term certain
then
decreases
to zero
at policy
period. on
a life
contract
a juvenile.
The
expiration.
 Payor benefit
decreasing death benefit is just
sufficient to pay the premiums on the
 Family income policy
juvenile life contract, i.e., until the
insured is 21.
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Endowment insurance
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Nature of endowment
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Endowment insurance is equivalent to term life
plus a pure endowment
Endowment insurance is equivalent to decreasing
term with increasing savings
Endowment policies provide the
face value upon death or the end
of the term if the insured survives
until term
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The pure endowment policy would
be the face value payment in the
event of survival till term
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Endowment insurance
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Types of endowment
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Uses and limitations
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Endowment contracts of 3-10 years are common in Asia.
Single premium endowment policies are popular in part of Europe
Long term endowment policies are popular in the UK as
companions to mortgage loans, i.e., preset to pay the loan balance
at term
Retirement income policy provides the face value or cash value
which ever is greater at term
Modified endowment policy is popular in some markets such as
Thailand. It provides periodic payments over the policy term which
are proportional to the insured amount plus the face value at term.
The endowments have had difficulty competing with whole and
term policies in the US and increasingly elsewhere also
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Questions
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Life insurers have actively responded to competitive pressures
in the financial services markets. How do the changes affect
life insurance from the savings and risk perspectives?
Reentry in term insurance allows life insurers to address
adverse selection. How do these provisions make term
insurance more attractive to consumers?
Explain the renewability and convertibility features of term
insurance.
Term and endowment are two forms of life insurance. Compare
and contrast the characteristics and objectives of the two policy
types.
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1. Insurers can offer lower-cost coverage
with the following approaches:
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2. Which of the following statements about
term insurance is true
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The insurance provides
protection for a specified
period of time.
Most policies can be renewed
for additional periods without
evidence of insurability.
Most policies can be
converted to a permanent life
insurance policy.
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1.
3. Decreasing term insurance is most
suited to meeting which of the following
needs?
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funeral expenses.
educational funds.
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or
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4. Under the conversion privilege of a
convertible term life insurance policy
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5.
The insured may convert to
another term policy at expiration.
The insured may convert to
another term policy prior to
expiration.
the insured may convert to a
whole life policy prior to
expiration.
the insured may convert to a
whole life after expiration
all of the above.