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MTHEL 131 (32)
Chapter 5

Chapter 5 Reading Notes

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Department
Mathematics Electives
Course
MTHEL 131
Professor
David Kohler
Semester
Fall

Description
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 Whole life as endowment or term insurance - most whole-life insurance is priced based on mortality tables that assume that all insureds die at a certain age (ex. 100) - when an insured exceeds that age, insurer pays the policy face amount, as if they had died  this is why they’re sometimes referred to as “age-100 endowments” Whole life cash values - many whole life policies are required to have cash values (which build to policy face amount, usually by age 100) - cash values are available to policy-owner at any time they terminate - policies usually contain schedules dictating values - under participating policies, dividends may be surrendered for cash, with no influence on the policy - also, policy owner can obtain a loan up to the policy’s cash value  interest charged  if not repaid, it is deducted from face value upon death Par and Nonpar whole life Participating vs. non-participating - Dividend illustration: shows prospective purchasers the dividends that would be paid if the company continues to profit at the same rate - Some companies have fixed dividends they pay, regardless of what happens to the company - Contribution principle: insurers selling participating policies distribute surplus depending on contribution to the surplus Types of whole life insurance policies Ordinary Life insurance - premiums are payable for whole of life - intended to provide permanent protection at modest annual outlay(expense) because mortality costs are spread over entire policy period - premium paid is not a measure of policy’s cost - cash values normally increase at constant rate, reaching face amount at 100 - there is greater flexibility now: o option to establish own level of premium payments o various riders - good for people who need 15+ years of coverage, and are interested in accumulating savings - too expensive for people whose careers are just beginning Limited pay whole life insurance - policy is in effect for entire life, but premiums are paid for a limited time - may be set number of years, or until specified age - policy becomes “paid-up” (not ‘matures’ or ‘expires’) - annual level premium is higher than that of other policies  not well adapted to those whose income is small - contains same non-forfeiture, dividend, settlement options as ordinary policies - 20-payment whole life policy: premiums are payable for 20 years - life-paid-up-at-age-65 whole life policy: self-explanatory - single-premium whole life policy: fully paid up from inception Current assumption whole life insurance - Has terms linked to the insurance company's earnings or performance as a stock or mutual fund - If lower mortality rates and expenses and/or higher than expected investment returns are experienced, policyholders benefit by an increase in the cash value of the policy, an increase in dividends paid, or a decrease in premiums - The death benefit remains the same regardless of performance - The cash value is also guaranteed not to drop below a predefined minimum paid  expenses deducted  remaining amount added to fund balance Product design: - either low-premium or high-premium category  if low premium, you pay less  if high premium, you pay more, but cash values increase a lot quicker - redetermination provision: after initial guarantee period, company can re- determine the premium - if new premium is lower than previous, policy owner may select: 1) pay lower premium, maintain death benefit 2) continue previous premium, maintain death benefit, have the difference added to accumulation fund 3) continue previous premium, use difference to pay for increased death benefit - if new premium is higher: 1) pay higher premium, maintain death benefit 2) continue old premium, lower death benefit 3) continue old premium, maintain death benefit, use up some available cash value Uses of CAWL - easier company and policy-owner administration - company has greater control over cash-value buildup - will l
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