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Term reserve

Discussion in 'SA2' started by 1495_sc, Aug 17, 2022.

  1. 1495_sc

    1495_sc Ton up Member

    Hello,

    We know that term reserve is very low hence related investment income is low as well. In hindsight, can someone please supplement to my understanding about why is the reserve very low?

    1. There is no guarantee provided to policyholder unlike endowment assurance. Hence, the tpx component or survival benefit is not relevant for term.

    2. Compared with whole life , the cashflows are limited to the term of the product, say 10 years, 20 years, 30 years, etc whereas whole life calculates cashflows until the end of modelling period (say age 110)

    3. Similar comparison with annuity as whole life, cashflows are for a limited term in term reserve.

    Thank you!
     
    1495_sc, Aug 17, 2022
    #1
  2. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    The reserve for a term assurance is low because there is only a small probability that the benefit will be paid out (= the probability of dying within the defined term). For an endowment assurance or whole life assurance, the probability of the benefit being paid out is 1, so substantial reserves need to be built up that are sufficient to meet that definite benefit payment.
     
    Lindsay Smitherman, Aug 18, 2022
    #2
    1495_sc likes this.
  3. nikita agarwala

    nikita agarwala Keen member

    Hi, can you please help me understand how there will be a financial risk from withdrawals at times when reserve is negative?
    Does it mean to say there is a financial risk from withdrawals at times when 'Asset share' is negative instead of reserve?

    below is copied from ch 1, pg 5:

    "There will also be a financial risk from withdrawals at times when the reserve is negative.

    The risk is exacerbated in the case of decreasing term assurances, since at later durations the cost of future benefits could be considerably less than the level premium being charged. This is mitigated sometimes by limiting the premium-paying term to less than the policy term."
     
    nikita agarwala, Sep 6, 2022
    #3
  4. nikita agarwala

    nikita agarwala Keen member

    Hi, I have another question. How are policyholders taxed on protection products?
     
    nikita agarwala, Sep 7, 2022
    #4
  5. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    Hi - you might find the following SP2 thread helpful:
    https://www.acted.co.uk/forums/inde...ance-reserve-vs-asset-share.10398/#post-39315
     
    Lindsay Smitherman, Sep 7, 2022
    #5
  6. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    Term assurance business: only benefit is death, no tax payable. See Chapter 6, bottom of page 5 & top of page 6
     
    Lindsay Smitherman, Sep 7, 2022
    #6
  7. nikita agarwala

    nikita agarwala Keen member

    Thank you Lindsay.
     
    nikita agarwala, Sep 7, 2022
    #7

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