Term life insurance and endowment insurance

Term life insurance and endowment insurance Richard MacMinn Copyright MacMinn.org

Objectives • Consider the competitive pressures facing life insurers • Consider how life insurers are responding to competitive pressures through product design and distribution • Define term and endowment life insurance • Describe the features of term life insurance • Describe and explain endowment life insurance MacMinn

The changing face of financial services markets • Factors contributing to change • International growth of life markets • Confluence of economic, cultural, demographic and technological factors • Convergence in financial services MacMinn

Insurance company reactions • Potentially lower cost coverage • Indeterminate premium plans • More refined classification systems • Provisions to encourage persistency • Increased flexibility • Face value may be changed at any time • Increased flexibility in premium payment MacMinn

Insurance company reactions • Greater disclosure • The disclosure of the elements of the policy, i.e. how much of the premium goes to mortality and expenses versus cash buildup • The transparency extends to annual transaction summaries that allows the policyholder to monitor the financial results and compare to policy illustration at time of purchase • Increased risk to consumers • Price competition has motivated insurers to offer less liberal guarantees and shift more risk to the consumer, e.g., in variable life and annuity products MacMinn

Types of life insurance • Term life • Endowment • Whole life MacMinn

Term life • Nature of term life • Renewability • Convertibility • Reentry • Quotes • Limitations of term life • Benefits • Indemnity cost is lower • Flexible and transparent • Costs • It does not provide a savings instrument • There is a renewal risk at term MacMinn

Types of term life • Level face value • Increasing premium • Level premium • Life expectancy term • Term to age 65 • Non-level face value • Types • Mortgage protection term • Payor benefit • Family income policy Increasing term is equivalent to renewable term. Note the classification and YRT rates in table 4-1 The life expectancy term provides protection for the life expectancy of the insured given age and sex. The level premium generates a cash value which increases and then decreases to zero at policy expiration. The family income policy is a decreasing term that provides a monthly income to a surviving spouse until a certain age or for a certain period. The payor benefit is usually a rider to a life contract on a juvenile. The decreasing death benefit is just sufficient to pay the premiums on the juvenile life contract, i.e., until the insured is 21. MacMinn

Endowment insurance • Nature of endowment • Endowment insurance is equivalent to term life plus a pure endowment • Endowment insurance is equivalent to decreasing term with increasing savings Endowment policies provide the face value upon death or the end of the term if the insured survives until term The pure endowment policy would be the face value payment in the event of survival till term MacMinn

Endowment insurance • Types of endowment • Endowment contracts of 3-10 years are common in Asia. • Single premium endowment policies are popular in part of Europe • Long term endowment policies are popular in the UK as companions to mortgage loans, i.e., preset to pay the loan balance at term • Retirement income policy provides the face value or cash value which ever is greater at term • Modified endowment policy is popular in some markets such as Thailand. It provides periodic payments over the policy term which are proportional to the insured amount plus the face value at term. • Uses and limitations • The endowments have had difficulty competing with whole and term policies in the US and increasingly elsewhere also MacMinn

Questions • Life insurers have actively responded to competitive pressures in the financial services markets. How do the changes affect life insurance from the savings and risk perspectives? • Reentry in term insurance allows life insurers to address adverse selection. How do these provisions make term insurance more attractive to consumers? • Explain the renewability and convertibility features of term insurance. • Term and endowment are two forms of life insurance. Compare and contrast the characteristics and objectives of the two policy types. MacMinn

1. Insurers can offer lower-cost coverage with the following approaches: • Indeterminate-premium plans • More refined risk-classification • Provisions to encourage persistency • All of the above MacMinn

2. Which of the following statements about term insurance is true • The insurance provides protection for a specified period of time. • Most policies can be renewed for additional periods without evidence of insurability. • Most policies can be converted to a permanent life insurance policy. • All of the above MacMinn

3. Decreasing term insurance is most suited to meeting which of the following needs? • funeral expenses. • educational funds. • mortgage payment. • retirement income. • none of the above. MacMinn

4. Under the conversion privilege of a convertible term life insurance policy • The insured may convert to another term policy at expiration. • The insured may convert to another term policy prior to expiration. • the insured may convert to a whole life policy prior to expiration. • the insured may convert to a whole life after expiration • all of the above. MacMinn

Term life insurance and endowment insurance