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MTHEL 131 Class Note Lecture 5

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University of Waterloo
Mathematics Electives
David Kohler

[Oct. 12, lecture 5] 1 Last lecture: - Participating policy holders are the owners of a mutual company - Mutual Life led the way, and sooner, the 3 other largest mutual in Canada, - They went through the process, demutualize, that of being a mutual company owned by the shareholders, to stock owned by policyholders -At the transition point, participating policy holders’shares of the value in the company was unlocked.And the value is paid across participating policy holders in the form either cash or share. 2 primary reasons for diversification 1. The mutual company, now a stock have more ability to raise capital 2. The capital can allow them to grow and compete more effectively in the Canadian finance services market place 4 stakeholders that benefited from the demutualization process 1. The participating policy holder: up until now, their policy and their ownership right were locked together 2. Insurer (company) 3. Investor: demutualization created four new publicly traded stock life insurance company, for investors who wanted to diversify their holdings inside the Canadian financial service market place, and diversify away from banks, invest in life insurance company 4. Canadian economy: you can buy one or all these four new Canadian stock company, for all internationals investors, they moved money to Canada and want to buy Canadian company, they purchased Canadian dollars first, then purchased the share Owning a house? Or Renting an apartment?  Renting: 3 Universal truths 1. Rent raises every year 2. As long as you want that apartment, you must pay every month 3. No matter how long you have been renting that apartment, when you final move out you receiver rental refund  Ownership of home: 1. When the mortgage is complete paid for, you can continues to live in that home for free without a mortgage payment 2. Over time, the value of your house will likely raise, and the value of your mortgage will [Oct. 12, lecture 5] 2 decrease, overtime you will build equity; when you sell your home, the equity that exists, goes with you 3. Overtime you pay your mortgage, the amount of payment each month is constant Summary of “RENT” vs. “OWN” Rent Own Payment Pattern Increasing Level Length of Payment Indefinite Finite At Move date No equity Keep Equity Which is better? Renting or owning? -> Is better to rent or own? - It depends; General statement, say that most people would, over the long term, would like to become owner - When it comes to 2 types of insurances, the difference is do you want to rent or own In the “Bob & Jane” case, Bob needs $500,000 coverage (answered question), both kinds are going to cover $500,000: 1. Term Insurance (renting): - Very inexperience - Price renew every certain period -After 10 years, in price goes up, and stays for another 10 years and then goes up, and stays 10 years and goes up, and level for another 10 years, and goes way up -After every 10 years, the increases is bigger and bigger, since Bob is older, every renew he is closer to death, insurer is going to charge more and more every time -At age 75 or 80, if Bob has hanged on this policy through every renew, and still alive, the insurance coverage expires at 75 birthday th - If he died before the 75 birthday, the coverage would be paid off $500,000 - If he canceled the policy at age 45, coverage is gone, no premium could get back 2. Permanent Insurance/Whole $ Term Insurance Life Insurance: - More experience - provides $500,000 coverage Permanent Insurance for life - Premium for life 0 10 20 30 40 Time (year) 0 0 0 0 [Oct. 12, lecture 5] 3 2 factor of choosing the type of insurance 1. Budget 2. Time frame for which need this coverage Ex.An individual has a mortgage that he is going to pay out 20 years. The debt is going to last 20 years, and then would be gone. In that case, the term insurance at that point (20 years), the cost is clearly less that permanent insurance Term vs. Permanent Insurance Term Permanent Premiums Increasing Level Payment Period To age 75 Tailored Coverage Period To age 75 Whole of life At Plan Termination No equity Equity Available Under permanent life insurance, there are 4 types: 1. Whole life: premium pay for whole life 2. Limited pay whole life: only pay for ___ years (ex. Pay premium until age of 65) - Shorter the payment period, the higher the premium is (the more insurer need to collect) 3. Universal life 4. Term to 100 (T-100) - Common: they cover the life insurer for the life of their life - Only condition that one of these policies would expire would be failure to pay premium - 10 years renewable term (Term 10) [In this lecture] $ - Price renew every 10 years Term 10 - Many others: 5 year renewable term; 20 years term True cost of insurance 0 10 20 30 40 Time (year) $ Term Insurance True Cost of Insurance
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