Life Products Questions

[SYABC]

I have a few questions about life insurance products:

1)For decreasing term assurance, why the financial risk from withdrawal is exacerbated if cost of benefit exceeds premium being charged? Isn't it favourable to insurance company if policyholder withdraw when the cost is higher than premium being charged?

2)Chapter 1 pg 10, "...guarantees under conventional with-profits are likely to be greater than many, but not all, guarantees provided by accumulating with-profits products" . How is this true in general? doesn't the benefit declared on current benefit for uwp give higher guarantee?

3) why is unit-linked death benefit always 101% of fund value?

4) For mortgage endowment product, why is the accumulating with-profits sold with term assurance and not decreasing term assurance as in conventional with-profits?

5) Variable annuties
-does guaranteed minimum income benefit work like guaranteed annuity option?
-what is the difference between guaranteed minimum income benefit and guaranteed minimum withdrawal benefit?


THanks a lot!

 

[bystander]

I'll give views on 3 and 4.

3. It isn't always but thats a typical level. Basically these aren't really protection products and hence the benfit is kept small. I think there is a limit after which it has to be classed as protection. Typically, it helps that the benefit is so small because cos don't feel they the need to reassure it, selection risk is negligible.

4. Possibly designed like that to ensure no shortfall on death. If you have a level term assurance in there, picked at or close to the mortgag the mortgage will pay off. A decreasing term assurance assurance does not necessarily follow the same curve as the mortgage reduces at so there is a reliance on bonuses to cover any difference

 

[mugono]

Hi

I'll give 1 and 2 a go.

1. I understand it as follows:
With a decreasing term assurance, a level premium is paid for a benefit that reduces over time. Therefore in the earlier years, the cost of benefit will be higher than the premium charged and in the later years the cost of benefit will be lower than the premium charged.

In the earlier years this will therefore mean a larger negative asset share (compared with a level term assurance for example), which exacerbates the risk from financial selection - the premium size isn't enough to cover the cost of benefits.

2. This is generally true because under cwp, reversionary bonuses are added to the sum assured, which is a future amount payable on maturity (eg 25 years from now). With uwp, bonuses are added to a (much smaller) current benefit. Hence the build up of the guarantees is much reduced.


Hope this is helpful, any queries are welcome

 

[cjno1]

Go on then, I'll take 5

-does guaranteed minimum income benefit work like guaranteed annuity option?

Yes. A guaranteed minimum income benefit (GMIB) acts like a guaranteed annuity, and it will be calculated at the inception of the policy based on the premiums the policyholder decides to pay. If they subsequently want to increase their premiums, an addition to the GMIB is calculated using the market rates at the time of the increase.

-what is the difference between guaranteed minimum income benefit and guaranteed minimum withdrawal benefit?

A guaranteed minimum income benefit is used on retirement to give a guaranteed annuity value for life. A guaranteed minimum withdrawal benefit is more like a guaranteed surrender value. So for example, it might say that, after 20 years you are guaranteed to be able to withdraw at least £100,000, even if the fund value is less than this.

The following is a great detailed explanation of how variable annuities work, it might help you further:

www.sias.org.uk/data/papers/VariableAnnuities/DownloadPDF

 

[SYABC]

Thanks for all the reply.

3. It isn't always but thats a typical level. Basically these aren't really protection products and hence the benfit is kept small. I think there is a limit after which it has to be classed as protection. Typically, it helps that the benefit is so small because cos don't feel they the need to reassure it, selection risk is negligible.

Why not just set as 100%?

 

[bystander]

Good qn to which I don't know the answer but may be tied up in what benefits a plan must give to have a certain category for solvency and/or tax purposes.

 

[Mark Willder]

3) why is unit-linked death benefit always 101% of fund value?

Why not just set as 100%?

If the death benefit was 100% then the contract would be a pure investment product. The FSA authorises only banks to sell pure investment products. So an insurer needs to introduce some element of protection (although only a very small amount) to be authorised to sell it.

Best wishes

Mark

 

[Adam]

Hi

I'll give 1 and 2 a go.

1. I understand it as follows:
With a decreasing term assurance, a level premium is paid for a benefit that reduces over time. Therefore in the earlier years, the cost of benefit will be higher than the premium charged and in the later years the cost of benefit will be lower than the premium charged.

In the earlier years this will therefore mean a larger negative asset share (compared with a level term assurance for example), which exacerbates the risk from financial selection - the premium size isn't enough to cover the cost of benefits.

2. This is generally true because under cwp, reversionary bonuses are added to the sum assured, which is a future amount payable on maturity (eg 25 years from now). With uwp, bonuses are added to a (much smaller) current benefit. Hence the build up of the guarantees is much reduced.


Hope this is helpful, any queries are welcome

Hi mugono,
On the point of "financial selection", could you shed some light on the following quote "Policyholders are more likely to be exercising financial selection against the insurers when purchasing a single premium policy. It should therefore be longer before an insurer considers letting them benefit from investment smoothing", please?

• What is the financial selection in this context?
• Why single premium has more financial selection?

Thanks.

 

[Em Francis]

Hi mugono,
On the point of "financial selection", could you shed some light on the following quote "Policyholders are more likely to be exercising financial selection against the insurers when purchasing a single premium policy. It should therefore be longer before an insurer considers letting them benefit from investment smoothing", please?

• What is the financial selection in this context?
• Why single premium has more financial selection?

Thanks.

Hi
Where did this quote come? It might help when putting it into context.
Thanks
Em

 

[Adam]

Hi
Where did this quote come? It might help when putting it into context.
Thanks
Em

Hi Em,
It is on bottom of page 17, SP2-21.
Thank you.

 

[Em Francis]

Hi Em,
It is on bottom of page 17, SP2-21.
Thank you.

This is basically because for single premium products, the policyholder can select against the company by investing the total single premium when markets fall so that they receive the benefits of investment smoothing. Whereas with regular premium they can only invest part of the total premium at this time. By the time they pay in the next regular premium, markets could have recovered.