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Term Assurance and Investment Returns

T

tatos

Member
How do you explain in a concise, simple way why poor investment return risk is not a major concern for term assurance products?
 
Short Answer:
Term assurance products have low reserves therefore investment return is not significant.

Caveat:
This of course assumes a regular premium structure. Investment return would be more significant for a SP term assurance.


Long Answer:

Term assurances have small regular premiums for a relatively large Sum Assured (calculate the net premium for a Term Assurance vs a Whole of Life or Endowment of same SA if you want to check). Renewal expenses and Claims will make up a large amount of each premium therefore the amount of the premium left over is small.

Some reserves are built up at the start of the contract, these occur as expenses will be expected to increase somewhat in line with inflation and q_x will increase over the duration of the contract as the policyholder ages.

These 2 factors mean that part of the earlier premiums go towards reserves to make up the potential shortfall in later premiums (which have larger claims and expenses for the same level premium). These reserves will be small though!!

Small reserve means even smaller investment return, especially as these are typically Conventional Non-linked designs and would likely be backed with fixed interest securities (they could be Unit linked or With Profits but this is less common).

Possibly too much detail, but there you go. If this doesn't answer your question let me know.
 
Last edited by a moderator:
You're welcome. I'm taking ST2, so that question fits in well to what I'm doing I guess!

Best of luck with CA1.
 
tatos said:
How do you explain in a concise, simple way why poor investment return risk is not a major concern for term assurance products?
Click to expand...

Also see SEP 2005 Paper 2, question 5 that I consider a beautiful solution by the examiners.
 
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