School of Economics

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• School of Economics
• Peking University
• Fall 2003

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• ????
• ????
• ???????

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• (?)Whole life as endowment or term insurance
• 1?Endowment-at-age-100 policies ??????
• 2?Term-to-age-100 policies ??????

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• (?)Whole life cash values
• 1. All whole life policies involve some
  prefunding of future mortality costs.
• 2. Whole life cash values are available to the
  policyowner at any time by the policyowners
  surrendering the policy.
• 3. Owners of whole life insurance policies do not
  have to surrender their policies to have access
  to funds.
• Policy loan

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• (?)Par and Nonpar whole life
• 1. Most whole life insurance sold worldwide is
  participating.
• Why?
• 2. Dividend illustrated vs. dividends actually
  paid
• Higher or lower?

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????

• (?)Ordinary Life
• (?)Limited-Payment Whole Life
• (?)Current Assumption Whole Life
• (?)Variable Life

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(?)Ordinary Life Insurance??????

• 1. ??
• Provides whole life insurance with premiums that
  are payable for the whole of life.
• Several other names
• straight life
• continuous-premium whole life
• whole life

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(?)Ordinary Life Insurance

• 2. ????
• (1)Par vs. Nonpar
• See Table 5-1 (5-2 in 12th)
• QWhose policy cost is lower?
• Lecture 7 Policy Evaluation will cover this topic.

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(?)Ordinary Life Insurance

• (2) Traditional vs. newer whole life policies
• Many newer products use a new-money interest rate
  crediting mechanism.
• Traditional products use the portfolio average
  method.
• Q Which one is more market-attractive?
• It depends.
• Although new-money rates move quickly, portfolio
  rates change slowly.

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(?)Ordinary Life Insurance

• 3. ????
• See Table 5-2 (5-3 in 12th)
• A traditional participating 100,000 ordinary
  life policy issued to a 35-year-old male
  nonsmoker.
• Dividends choice
• being netted against the premium payment, or
• purchasing paid-up additional insurance
• ??????????????

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(?)Limited-Payment Whole Life Insurance ????????

• 1. ??
• Policy remains in full force for the whole of
  life, but premiums are payable for a limited
  number of years only, after which the policy
  becomes paid up for its full face amount.
• A paid-up policy should not be confused with a
  matured or an expired policy.

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(?)Limited-Payment Whole Life Insurance

• 2. ????
• Premium payments may be fixed at almost any
  number of years from 1 to 30, or even more.
• Examples
• 20-payment whole life
• Life-paid-up-at-age-65 whole life (LP65)
• Two extremes
• Single-premium whole life
• Ordinary life
• Limited-payment contracts vary between these
  extremes.

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(?)Limited-Payment Whole Life Insurance

• 3. ??????
• Figure 5-1
• The size of the cash value varies inversely with
  the length of the premium-paying period.

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(?)Current Assumption Whole Life ????????

• 1. ??(CAWL)
• Provide (usually) nonpar whole life insurance
  under a nontraditional, transparent format that
  relies on an indeterminate-premium structure.
• Typically use new-money interest rates and
  current mortality charges in cash-value
  determination.
• Also referred to
• Interest-sensitive whole life
• Fixed-premium universal life
• CAWL policies are unbundled.
• Allocation visible (See Figure 5-2 Funds Flow)

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(?)Current Assumption Whole Life

• 2. ????
• Traditional whole life relies on dividends as the
  mechanism for passing through deviations of
  actual from assumed operational experience.
• CAWL relies on changes in the cash values and
  premiums to accommodate deviations in operational
  experience from that guaranteed in the contract.

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(?)Current Assumption Whole Life

• 3. ???????????????
• (1)Low premium version
• The initial premium is low by traditional
  standards.
• Redetermination provision
• After the initial guarantee period, the company
  can redetermine the premium. (usually every 5
  years, subject to minimum interest rate and
  maximum mortality charges)
• The new premium could be lower or higher than the
  previous premium.

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If lower

• Policyowner has three options
• Pay the new, lower premium and maintain the
  previous death benefit.
• Continue to pay the previous premium, maintain
  the previous death benefit, and have the
  difference in the two premiums added to the
  accumulation fund.
• Continue to pay the previous premium and use the
  difference to pay for an increased death benefit,
  subject to evidence of insurability.

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If higher

• Policyowner has three options
• Pay the new, higher premium and maintain the
  previous death benefit.
• Continue to pay the previous premium but lower
  the policy death benefit.
• Continue to pay the previous premium and maintain
  the previous death benefit while using up some of
  the available cash value.
• This option is not always available and, when
  available, requires the accumulation fund to be
  at or above a certain level for at least the next
  five policy years.

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3. ???????????????

• (2)High premium version
• The premium is relatively high but typically
  guaranteed never to increase.
• An optional vanish pay provision is usually
  contained.
• Policyowner may elect to cease paying premiums at
  some point in time and have the policy become
  self-sustaining.
• How to determine the time point?
• Compare the accumulation account to a net single
  premium needed to pay up the contract. If
  exceeding, OK.
• Vanish pay is not guaranteed.

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4. ????

• See Table 5-3 (5-4 in 12th)
• Difference between low and high premiums is
  significant.
• Redetermination period 5 years
• At current rates and assumptions, the
  high-premium policy could be tentatively
  self-sustaining at the end of seven policy years.

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(?)Variable Life Insurance ???? VLI

• 1. ??
• Also called unit-linked life insurance. (What in
  China?)
• It was introduced as a product that could help
  offset the adverse effects of inflation on life
  insurance policy values.
• It was believed that, over the long term, the
  investment experience of common stocks supporting
  the policies would increase at a rate faster than
  the inflation rate, thus providing a hedge
  against inflation.
• Although true historically over periods of many
  years, short-term variations are inevitable, with
  inflation heading in one direction and investment
  performance in the other.

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2. ????

• (1) separate account
• Death benefits and cash values vary to reflect
  the investment performance of a separate account.
• Premiums less expense loads and mortality charges
  are paid into the separate account.
• The policyowner may specify, within limits, where
  the assets backing the cash value are to be
  invested.
• Several options are generally available.

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(2) death benefit

• Is composed of two parts
• A guaranteed minimum death benefit
• Variable part

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3. ??

• Issuers of VLI must, as with all insurance
  products, comply with insurance laws and
  regulations.
• In the US, variable contracts and their issuers
  are also subject to federal securities laws and
  are regulated by SEC.

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4. ????

• ?????????,?????
• (1) reinstatement
• the past-due premiums collected must not be less
  than 110 of the increase in cash value
  immediately available upon reinstatement. Why?
• (2) policy loan
• At most 75 of CV at a fixed or a variable
  interest rate.
• It presents an opportunity for a policyowner to
  influence the policys variable benefits.
• In making a loan, the policyowner may make the
  policy less variable while the loan is
  outstanding. Understand?

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5. ????

• See Table 5-4
• Different interest rate assumptions can make a
  big difference.

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???????

• 1. Second-to-die policy ??????
• 2. First-to-die policy ??????

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1. Second-to-die policy

• (1)??
• Also referred to as survivorship life insurance
• Premiums are relatively low.
• Joint probabilities 0.0010.0020.000002
• Three ways of charging
• Level
• Increase
• cease

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1. Second-to-die policy

• (2)??????
• The split option allows the survivorship policy
  to be split into two individual policies, one on
  each insured.
• The option can be elected only under certain
  conditions whose occurrence would be expected to
  be unrelated to the policy (typically on
  divorce). Why?

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1. Second-to-die policy

• (3)??
• Well situated to meet the need for cash to cover
  estate taxes and related expenses on the second
  death.
• Also used to provide financial security for a
  disabled child or dependent relative in
  situations in which one death would not
  necessarily result in financial disaster but two
  would.

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2. First-to-die policy

• Also called joint life insurance.
• Pays only on the death of the first to die and is
  terminated at that time.
• Often used to insure both the husband and wife,
  with each being the beneficiary for the other.
• Most provide that if both insureds die in a
  common disaster, the insurer will pay the face
  amount on each death.
• The importance of having a contingent beneficiary
  is clear.
• Premium higher or lower?

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Reading requirement

• P102 para. 3 to P115 para. 4.