Life coverage and Annuities.

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Life coverage and Annuities Phrasing Sorts of extra security items Expense treatment of disaster protection Term protection Enrichment protection Entire life coverage General protection Variable protection Wording Passing advantage = sum recipients get
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Life coverage and Annuities Terminology Types of life coverage items Tax treatment of disaster protection Term protection Endowment protection Whole extra security Universal protection Variable protection Ins301 Chp15 –Part1

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Terminology Death advantage = sum recipients get Cash esteem = measure of reserve funds collection Death assurance = measure of unadulterated demise assurance = passing advantage - money quality Face sum = expressed measure of scope = demise advantage (for term, entire life, & some all inclusive life) = demise advantage - money esteem (for some widespread life) Cash surrender esteem = the measure of cash that the policyholder can pull back (=cash esteem - surrender punishment) Ins301 Chp15 –Part1

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Life Insurance Products: General Introduction Term protection immaculate life coverage Cash esteem life coverage unadulterated life coverage + Savings aggregation entire life all inclusive life variable life Variable all inclusive life Ins301 Chp15 –Part1

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Tax Treatment of Life Insurance Death advantages are not saddled Income duty is not paid on expansions in real money esteem while the approach is in power Upon surrender, pay expense is paid on Cash surrender esteem - entirety of all premiums + total of all policyholder profits Ins301 Chp15 –Part1

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Implications of Tax Treatment Implicit profits for investment funds gathering Escape assessment if guaranteed kicks the bucket Tax conceded if the strategy is surrendered Partially exhausted if arrangement is surrendered Amount which is burdened is not exactly verifiable return b/c some piece of premiums is expense of death assurance Ins301 Chp15 –Part1

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Term Insurance Typically gives immaculate passing assurance over a settled term, normally one year or five years. There is no investment funds include and in this manner no money surrender esteem. Information 1/4 of strategies 50% of death assurance obtained Guaranteed renewable Premium increments after some time. Why? Ins301 Chp15 –Part1

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Life Insurance Pricing Ignore costs and danger burden ==> concentrate on net premiums Use mortality table Probability of kicking the bucket at age x contingent on living through age x-1 Example: Probability of male biting the dust at age 40 = 0.00302 Assume Premiums paid at start of year Claims paid at end of year Ins301 Chp15 –Part1

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Pricing 1-Year Term Find reasonable premium for $100,000 1-year term for 40 year-old Interest rate = 10% Insurer’s money streams: Beg. of Year End of Year $100,000 with prob 0.00302 Loss $0 with prob. 0.99698 Expected case cost = ________ Premium = Present estimation of expected case cost = __________ Ins301 Chp15 –Part1

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Pricing 1-Year Term Find reasonable premium for $100,000 1-year term for 41 year-old Interest rate = 10% Insurer’s money streams: Beg. of Year End of Year - $100,000 with prob ____________ Premium $0 with prob. ____________ Expected case cost = ___________ Premium = Present estimation of expected case cost = ____________ Ins301 Chp15 –Part1

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Pricing 1-Year Term Premium increments as likelihood of kicking the bucket increments Ins301 Chp15 –Part1

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Pricing 2-Year Term Find reasonable premium for $100,000 2-year term for 40 year-old Insurer’s case expenses: Beg. of Year 1 End of Year 1 End of Year 2 - $100,000 -$100,000 with prob 0.00302 with prob x $0 $0 with prob. 0.99698 with prob 1-x Ins301 Chp15 –Part1

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Pricing 2-Year Term What is x? – it is the likelihood of a 40 year-old biting the dust in his 42nd year? Mortality table: Number Number Age of People of Deaths 40 937723 2832 41 934891 3076 Probability of 40 year-old kicking the bucket in 41st year =_____ = ______ Probability of 40 year-old biting the dust in 42nd year =_____ = ______ Ins301 Chp15 –Part1

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Pricing 2-Year Term Single premium Level Premium Ins301 Chp15 –Part1

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Endowment Insurance Pays face sum if the safeguarded passes on, or if the guaranteed survives the approach period It is like a sparing record The US no more gives assessment point of preference to gift arrangements unless they have a long length of time, for example, entire extra security. Ins301 Chp15 –Part1

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Whole Life Insurance Policy period closes when safeguarded achieves 100 Equivalent to gift approach to 100 Premiums single premium restricted pay – a level premium paid for a 10-year or 20-year period persistent premium – level premium proceed until the policyholder kicks the bucket, surrenders the arrangement, or achieves the age of 100 (whichever starts things out) Ins301 Chp15 –Part1

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Whole Life Insurance Premiums by and large don\'t increment after some time But likelihood of passing on expansions after some time ==> higher forthright premiums than with term Policyholder “prepays” some piece of the expense of future demise security qualified for prepayments if strategy is surrendered this is the money esteem (funds amassing) Ins301 Chp15 –Part1

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Whole Life Insurance If guaranteed bites the dust, recipients get face sum = demise assurance + money worth Structured so money esteem  over the long haul demise security  after some time Ins301 Chp15 –Part1

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Whole Life Insurance Ins301 Chp15 –Part1

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Pricing Single Premium Whole Life Apply same standards utilized with term protection Forecast anticipated that money streams would age 100 Find single premium = PV of expected expense Assume no costs or benefits 5% premium rate strategy won\'t slip by Ins301 Chp15 –Part1

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Pricing Single Premium Whole Life Single Premium Ins301 Chp15 –Part1

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Continuous Level Premium Whole Life Continuous level premium Same premium is paid until guaranteed bites the dust or achieves 100 Equivalent to an existence annuity Present estimation of an existence annuity that pays $P beginning at age 40 = 16.30 * P Find P so that PV of premium installments = PV of expenses 16.30 * P = $22,373 ==> P = $1,372.58 Ins301 Chp15 –Part1

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Limited Payment Whole Life Limited installment level premium Same premium is paid for altered number of years Example: 20 years Equivalent to a 20 year annuity Present estimation of a 20-year annuity that pays $P beginning at age 40 = $12.58 x P Find P so that PV of premium installments = PV of expenses 12.58 x P = $22,373 ==> P = $1,778.45 Ins301 Chp15 –Part1

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Comparison of Cash Values in Whole Life Ins301 Chp15 –Part1

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How Much Life Insurance Should be Purchased? Dependable guidelines Death advantage = 8 times pay Forecast recipients sources & employments of trusts Uses: Living costs Education costs Sources: Social security Earnings Ins301 Chp15 –Part1

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Participating Policies Can (and ordinarily does) pay yearly profits dependably with shared organizations regularly with stock organizations Why? - premiums taking into account moderate suspicions Key suppositions: premium rate levels and death rates These variables are related crosswise over policyholders Insurer’s strategies for managing corresponded danger: Bear the associated hazard and hold a ton of capital Share connected danger with policyholders Illustrated versus real profits Ins301 Chp15 –Part1

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Other Whole Life Policy Provisions Surrender Options Take money worth Use money esteem as a solitary premium for paid up entire life term arrangement Policy advances get against money quality premium now shifts with business sector rates in 1970s & 80s, settled rate ==> disintermediation Front-end cost charges ==> Cash quality develops gradually at first ==> Implicit return on investment funds amassing initially low Ins301 Chp15 –Part1

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Universal Life Similar to entire life Main contrasts: Greater adaptability in premium installments Cash worth does not take after an altered timetable; it fluctuates with policyholder’s premium installments insurer’s cost and mortality charges rate guarantor uses to credit enthusiasm to money esteem least rate generally ensured rate frequently connected to fleeting premium rates Ins301 Chp15 –Part1

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Factors Affecting UL Cash Value Ins301 Chp15 –Part1

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Death Benefit Options with Universal Life Level passing advantage (as with Whole Life) Death advantage changes with money esteem Death advantage Death advantage Cash quality Cash quality age Ins301 Chp15 –Part1

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Variable Life Similar to entire life Main contrasts: Cash quality does not take after an altered calendar; it differs with profit earned for arrangement of common trusts picked by policyholder Death advantage least is ensured, yet differs with money esteem Ins301 Chp15 –Part1

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Life Insurance and Annuities (part3) What is annuities The motivation behind annuity Classification of annuity Overview of annuity contracts Ins301 Chp15 –Part1

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What is Annuity An annuity is essentially a progression of occasional installments. An annuity contract is a protection approach that guarantees to make a progression of installments for a settled period or over someone’s lifetime It is ordinarily utilized as long haul retirement financing vehicles. Ins301 Chp15 –Part1

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Two Periods of Annuity Accumulation period - the period when the policyholder pays premiums to the safety net provider Payout period - the back up plan makes installments to the policyholder Ins301 Chp15 –Part1

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Purpose of Annuity Risk administration reason Reduce the danger that reserve funds are depleted before the annuitant kicks the bucket expense conceded sparing vehicle Returns earned from these agreement are not exhausted until the guarantor disperse them Ins301 Chp15 –Part1

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Classification of Annuity Immediate annuity and conceded annuity Immediate Def

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