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Midterm Exam Review (Readings)

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Mathematics Electives
David Kohler

Readings Review – Midterm Chapter 1 Types of insurance - whole life insurance: provides coverage for the whole of the insured’s life - term insurance: pays benefits only if insured dies during the policy term - endowment insurance: pays benefits if the insured dies during policy term, and if the insured survives the policy term - annuity: contract that promises to pay the insured (annuitant) a monthly payment starting at specified age. If payments cease upon death, it’s called a life annuity - health insurance: payment is contingent on the insured incurring expenses or losing income due to health - disability income insurance: payment provoked by mental/physical incapacity preventing the insured from working - long-term care insurance: if incapacity prohibits insured’s activities of daily living - medical expense insurance: covers health care expenses Conditions for perfectly competitive insurance market: 1. large number of buyers and sellers so that no one of them can influence the market 2. sellers have freedom of entry into and exit from the market (ex. New firms can start if they see that existing firms are making excess profit) 3. sellers produce identical products (buyers have no incentive to pay more than the market price) 4. buyers and sellers are well informed about products Imperfections in Insurance Markets Economic Basic for Life and Health Insurance: Insurance is subject to laws of supply and demand Human capital: production potential of an individual - Estimating the value of human capital relies on yield rather than cost Human life value concept: measure of person’s future earnings, or values of service - Net earnings minus self-maintenance costs such as food, shelter - Subject to loss through 1)death 2)incapacity 3)retirement 4)unemployment - Life and health insurance preserve individual’s human capital in the face of an uncertain lifetime Production of life and health insurance Insurance production process - relates to pricing, underwriting, claims handling - actuaries determine insurance premiums and necessary reserves using their best estimates of future losses and expenses, with an eye toward competitiveness - the more time between premium and payout, the greater the influence of investment returns. Distribution - insurers sell insurance 1) through direct response 2) through agents 3) through banks - majority is sold through agents - banks sell lots of annuities and life insurance in major countries, banks aren’t allowed to underwrite Chapter 2 Pricing individual life and health insurance Objectives of pricing: 1) premium rates should be adequate 2) they should be equitable 3) they should not be excessive Elements of pricing: 1) probability of insured event occurring 2) time value of money 3) benefits promised 4) loadings to cover expenses, taxes, profit, contingencies Life insurance rate computation Single premium plan - to pay for the entire policy with a single premium Level-Premium plan - company can accept same premium each year, provided that (over time) it will be equivalent of the single premium Flexible-Premium plan - policy owner can decide how much he wants to pay (ex. universal life policies) Experience participation in insurance Nonparticipating insurance - all policy elements (premium, benefits, cash value) are fixed, guaranteed, and don’t allow values to vary Participating insurance - give owners right to share surplus funds accumulated by insurer - surplus is paid to owner as dividends (or bonuses) Relation of cash surrender values, reserves, asset shares Cash surrender value: amount made available to a withdrawing policy owner Policy reserve: value that the company should hold if it meets all its liabilities Asset share: the value which the company holds till date i.e. the actual deposits in respect of a policy  usually less than reserves in the beginning  when assets exceed reserves, the company recovers first year expenses and assets begin to grow at higher rate Chapter 3 The importance of life and health insurance Aside from financial protection, life and health insurance has other benefits, such as: - Assists in making savings possible - Furnishes safe and profitable investment - Encourages thrift individuals who wouldn’t otherwise save will pay premiums - Minimizes worry and increases initiative - Furnishes an assumed income in the form of annuities - Helps preserve an estate  life insurance is not taxable Life and health insurance and society Insurance benefits society: - contributes to social stability - reduces financial burden on the state caring for the aged, families of deceased breadwinners - insurance companies can invest - generates employment - more favourable credit terms for loans - minimizes financial disruption to business caused by death of employees - employee benefit plans improve employee/employer relations Factors affecting life and health insurance consumption - Price - Economic environment  level of a country’s economic development - Inflation and interest rates - Demographic environment  Aging population  Education  Household structure - Industrialization and urbanization - Social environment - Political Environment  stability influences insurance demand  government determines how attractive these products are (due to taxation) - Internationalization  economic events in large countries can cause economic fluctuations in others Chapter 4 Type of policies 1) Term life insurance, 2) endowment insurance, 3) whole life insurance Term life insurance - Protection for a number of years, after which the policy expired with no maturity value - face amount is payable only if death occurs during that period - premium rates are lower than those of other types of insurance - policies have no cash value, or dividends There are three important features: Renewability - policy owner can renew without proof of good health, until age 65 or 70 - premium increases with each renewal Convertibility - allows policy owner to exchange term policy for cash value insurance contract, without evidence of insurability Reentry - possibility of paying a lower premium if insured demonstrates that they meet insurability criteria Types of term life-insurance policies Level Face amount policies - level death benefit over the policy period - premiums either increase with age, or stay level Increasing Premium: - Yearly renewable term, or 5-year renewable term Level Premium: 1. Term is 10-20 years. Premium stays the same over that period. Non- renewable after that 2. Term covers working lifetime a. life-expectancy term b. term-to-age-65 (or 70) Non-level face amount policies - Face amount increases/decreases with time Decreasing: - Mortgage protection term policy - Term insurance that decreased by a fixed amount each year - Payor benefit: rider that pays all premiums of a juvenile until age 21, if the payor dies/becomes disabled - Family income policy: provides monthly income while children are growing up. Beneficiary receives payments if insured passes away. If the insured is alive at the end of the period, the policyholder receives the face value Increasing: - Cost-of-living-adjustment: premium amount increases with inflation, as does the face value - Return-of-premium feature: if insured dies within the term, beneficiary gets exact value of premiums paid Uses and limitations of term insurance - Useful for people with low incomes, and high insurance needs - Useful for ensuring that mortgage/debts are paid upon death - Natural for all situations that call for temporary insurance needs Endowment insurance Promises not only face amount upon death, but also if insured survives Types of endowment policies - Retirement income policy - Semi-endowment policy  upon survival, pays half of the death benefit - Modified endowment policy  periodic payment of set percentage of the insured amount - Juvenile endowment policy  mature at specific ages  designed to cover education, marriage, independence costs Uses and limitations of endowment insurance Sales have declined in favour of term and whole life policies Benefits: - favourable tax treatment - strong savings impetus(push/incentive) Chapter 5 Whole life insurance policies - Provides for the payment of the face value upon death, regardless of when the death occurs - Face amount remains the same, but dividends are often used to increase the total benefits paid - many whole life policies are required to have cash values (which build to policy face amount, usually by age 100) - can be Participating or non-participating Types of whole life insurance policies Ordinary Life insurance - premiums are payable for whole of life - cash values normally increase at constant rate, reaching face amount at 100 Limited pay whole life insurance
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