Life Insurance

Chapter 1

Life Insurance Policies

Types of Life Ins. PoliciesThere are 3 types of life insurance policies:

First: Death Benefits Policies:

1-Term Ins.2-Whole Life Ins.

Second: Survival Benefits Policies:1-Pure Endowment.2-Life Annuities.

Third: Death & Survival Benefits Policies:Endowment Ins.

First: Term Insurance Main Characteristics of Term Insurance:a) It pays the face amount to the beneficiary if

the insured dies within a specified period (1,5,10 yrs or up to 65 or 70).

If the insured outlives the period, the insurer pays nothing.

Term insurance is similar to property insurance. If there is no loss to a home while a policy is in force, insurer pays nothing. This is also the case with term insurance.

First: Term Insuranceb) As property, term insurance doesn't build savings

- cash value - as do other types of life insurance, it provides “pure death protection” only.

c) Premiums' rates of term policy < any life policies and increase with age.

d) Early lapse rate is > any life policies because there is no penalty for early termination. High early lapse rate causes losses for insurer because:

First: Term Insurance- It can’t fully recover underwriting and first

year commission expenses.

- It leads to adverse selection (insureds with good health only terminate insurance) insurer uses discount for multi-year payments and stringent underwriting to face lapse rates).

First: Term InsuranceThe Main Features of Term Insurance:

1- Renewability: allows the insured to continue the coverage up to a specified age (up to 65 or 70) regardless of health status.

Ex: if a 5 yrs term policy is not renewable, insurer ends insurance after 5 yrs but it can’t end it if it is renewable.

Each time the policy is renewed, premium increases as age increases.

Insureds view renewable term policy as increasing premium, level benefit.

First: Term Insurance2-Convertibility: this option allows the insured to

convert term policy to a whole life policy without evidence of insurability.

It is a privilege if the term insurance is about to expire and he wishes to continue insurance or to begin a savings program when his income increases.

Also, it benefits the insured if he found that he had chosen the wrong policy (term insurance) that doesn't meet his present and future need, so, he can convert it to whole life insurance.

When the insured convert it, the premium increases on standard rate.

First: Term InsuranceTwo types of conversion:1- From attained age as a new insured

with standard rate.

2- From age of issuing term policy with rate that would have been paid at this time, insured pays the difference between

premiums of whole life and term + interest from time of purchasing term to time of conversion.

First: Term Insurance3-Reentry: 3 types of mortality tables:

a)Select mortality table: mortality rates based on insureds lives only, it’s rates < other people of the same age (because of medical examination & other conditions). The selection effect lasts 5-15 yrs.

b)Ultimate mortality table: mortality rates based on insureds who live only after the selection’s effect period lapses, it’s rate > select table.

c)Aggregate mortality table: mortality rates based on select & ultimate (rates > select & ultimate).

First: Term InsuranceReentry term insurance is based on aggregate

table, i.e. select & ultimate.

If 3 men each 40 yr now purchased term insurance with reentry (select & ultimate), the 1st purchased it 2 yrs ago, the 2nd one yr ago & the 3rd now, so, the 1st pays premium > the2nd & the 2nd pays > the 3rd.

If the policy contains reentry option, insured can tries to reenter the select group each 5 yrs if he qualifies & pays lower premium.

First: Term Insurance Types of Term Insurance Policies:

1- Level Amount: two types:

1/1-Increasing Premium: premium increases as age increases. Insureds view renewable term policy as increasing premium, level benefit.

2/1-Level Amount & Level Premium: 2 types:

Up to age 65 or 70 & for life expectancy.

Both builds up savings (cash value) up to specific age & decline to 0 at expiration.

First: Term Insurance2- Non-Level Amount: two types:

2/1 - Decreasing: used to pay off the debt:

Mortgage protection term insurance: to pay the outstanding balance.

Payor benefit term insurance: used in case of having life insurance on a juvenile to pay the outstanding premiums in case of parent death.

Family income term insurance: provides protection to the family if the insured dies.

First: Term Insurance2/2 - Increasing: used in many ways:

Cost of living adjustment (COLA): it pays an amount increases each yr with inflation or any index with minimum amount the 1st year.

Return of premium feature: it pays

the amount of insurance + the premium paid up to death.

Par (Dividends): it pays a dividend each yr + the amount of insurance.

First: Term Insurance Uses & Limitations of Term Insurance:

a) If you have limited amount to pay for whole life insurance, buy convertible term insurance.

b) If you need a temporary decreasing protection (mortgage debt & education).

c) Guarantee evidence of insurability if you need permanent protection in future & don't have enough money now (buy convertible).

First: Term Insuranced) Used to indemnify the death of the

business partner or a key person.

e) Used if you put all money in a new business, if you die early your family lose most of the capital.

f) Used to fund kids grow up and education.

First: Term Insurance Advantage of Term insurance : provide reasonable

protection for low premium and younger age.

Disadvantage or Limitation of Term insurance:

a) Premium increases with age up to prohibitive levels and unsuitable for large amount needs.

b) No cash value (or limited) if you need it.

c) If you become uninsurable and it is unconvertible, you lose your protection.

d) Not suitable if needs change.

First: Term Insurance“Buy Term & Invest the Difference” some

see that: if you can not afford to buy whole life insurance, buy term and invest the difference, then, the term and investment will outperform the life insurance cash value.

The problem is: you may fail in your investment or to set aside the difference regularly.

Second: Endowment Insurance It pays the amount of insurance if the insured still

alive at the end of a stipulated age or if he dies before that age.

Two Ways to see the Endowment Insurance:

a) The Mathematical Concept:

Endowment = Term Insurance + Pure Endowment

b) The Economic Concept:

Endowment = Decreasing Term + Increasing saving

Second: Endowment InsuranceAs under pure endowment insurance,

cash value increases and in case of death this cash value is supplemented by decreasing term insurance and both equal the insurance amount at any time.

Second: Endowment Insurance Types of Endowment Premiums:

Single, annual level and limited annual level premium.

Types of Endowment Policies:

1- Retirement Income Policy: amount paid at death is the greater of insurance amount or cash value.

2- Semi-endowment Policy: the amount paid upon survival = ½ amount at death.

3- Modified Endowment Policy: the amount paid at death is

a % of the amount of insurance + the maturity amount.

Second: Endowment Insurance4- Deposit Endowment Policy: the amount

paid at maturity = a multiple of the renewal premium - 1st premium.

5- Juvenile Endowment Policy: pays cost of education, marriage and independence.