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Introduction to Life and Health Insurance Products.doc

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Mathematics Electives
David Kohler

Introduction to Life and Health Insurance Sunday, October 13, 2013 10:22 AM Life Insurance Product Innovations Company Reactions • Increased competition • Agents demanding low-cost, high quality products and services for their customers • Potentially Lower Cost Coverage o Competition has led to increased productivity and riskier investments o Some investments backfire and reduced financial solidity o Intermediate-Premium Plans • Non-par and non-guaranteed • Dual premium structure  Guaranteed maximum  Lower premiums that fluctuate periodically on a classwide basis o More Refined Classification Systems • Classification is more specific • The lower the risk, the lower the premium o Provisions to Encourage Persistency • High costs for early surrenders • Increasing bonuses for remaining in force for a certain number of years • Increased Flexibility o Because of technology support has developed, flexibility in policies has increased o Face amount may be increased or decreased, usually subject to insurability requirements o Flexible premiums • Greater Disclosure o Policyowners are now disclosed to how each premium payment is used o Disclosure to assumed interest rate o Annual policy transaction summaries detailing policy financial results • Increased Risk to Consumers o Enhanced flexibility -> increased cost o With the provided lower premiums, insurers have shared some of the risk with policyowners under newer products especially variable life insurance Overview of Types of Life Insurance Term Insurance • Expiration date -> terminates with no maturity value • Lower initial premium rates • Much simpler policies because of no csv and dividends leads to fewer information problems • Viewed as a commodity, easily replaced because of few penalties attached to early cancellation, therefore there are higher lapse rates than for other policies • Losses o Inability to recoup fully underwriting and first year commission expenses o Usually those that terminate are considered a good risk o Persisting insureds pose greater risk and therefore there is adverse selection o To minimize lapse rates, insurers offer discounts for multiyear premium payments and also require more stringent underwriting • Renewability o To continue to the policy for a limited number of additional periods is considered a call o Each renewal leads to higher premiums based on the insured's attained age o Adverse selection is a result of increasing premiums since those in good health tend away from higher rates o From policyowner's perspective, term insurance may be viewed as increasing-premium, level-benefit term life insurance • Convertibility o In a period usually shorter than the policy duration, policyowners may convert to a cash value insurance without proof of insurability o As with any call option, the value stems from the holder's ability to exercise the option on conditions most favourable to him or her o Conversion credit: given against the new policy's premium as an amount equal to the previous year's term premium, or as a fixed percentage • Reentry o Features that allows the possibility of paying a lower premium than otherwise if insureds can demonstrate that they meet certain continuing insurability criteria o Select mortality tables • Mortality experience of newly insured lives • Exhibit lower mortality since they qualified to be insured in the first place o Ultimate mortality table • Mortality experience beyond the select years • Exhibits higher mortality since the initial benefit of selection has faded o Aggregate mortality table • Data from select and ultimate experience o Reentry term premiums are usually based on select/ultimate mortality split o Premium rates therefore depend on age and duration since the insured last exhibited insurability o Those who demonstrate insurability receive select premiums for their attained age o Otherwise, ultimate rates, which are higher than the rest, will be applied Types of Term Life Insurance Policies • Level Face Amount Po
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