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MTHEL 131 (32)
Chapter 4

Chapter 4 Reading Notes

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Mathematics Electives
David Kohler

Chapter 4: Intro to products Recent innovations Various factors affect life and health insurance supply and demand. Innovations are required to protect profitability. Competition among service retailers is increasing, and new requests are being made, such as: 1. Potentially Lower-cost coverage - competition puts pressure on companies to develop lower-cost policies - insurers seek riskier investments - other methods of providing lower-cost policies: - Indeterminate-premium plans o type of whole life insurance that specifies two premium rates: a guaranteed maximum, and a lower rate you actually pay. o The lower premium level is for a set period of time. Then the company establishes a new rate, but your premium can never be more than the guaranteed maximum. - More refined classification systems o Persons of higher risk get charged more o There are 6 sets of rates - Provisions to encourage persistency o To avoid lapses, insurers charge high costs for early surrender, and bonuses for policies that remain for a number of years 2. Increased flexibility - face amount can be increased/decreased - premium payments can vary 3. Greater disclosure - purchasers know various pricing elements - interest is also disclosed - policy owners get annual transaction summaries Increased risk to consumers - enhanced flexibility is more costly - cheaper policies involve more risk - promised interest rates may not be met 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 - buyers suffer fewer information problems - policies have no cash value, or dividends - term lapse rates are higher, compared to other types of policies o problem because 1) harder to cover underwriting expenses 2) healthy ones lapse, while unhealthy ones stay 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 - “increasing premium, level benefit” Convertibility - allows policy owner to exchange term policy for cash value insurance contract, without evidence od insurability - this increases flexibility of the insurance - term policy cannot be renewed if insured becomes uninsurable Reentry - possibility of paying a lower premium if insured demonstrates that they meet insurability criteria - There are three types of mortality tables: o Select mortality table o Ultimate mortality table o Aggregate mortality table - Traditional term premiums are based on aggregate mortality experience - Premium rates vary not only by age, but also by duration of policy Types of term life-insurance policies Usually provide a level or decreasing death benefit, with some increasing death benefit riders sold. Rider: attachment to policy that either adds benefits, or excludes losses Increasing Premium Level Face amount Types of Term Level Premium Life Insurance Non-level face amount Level Face amount policies - most popular type - 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 - Rates differ for different risks (ex. smokers/non-smokers) - Minimum issue age ranges
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