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Life insurance and annuities

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Simplest life policy. For one period. Premium = PV of expected claim expenses ... Life insurance is a tax favored instrument. Death benefits not taxable ... – PowerPoint PPT presentation

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Title: Life insurance and annuities


1
Life insurance and annuities
  • Chapter 12

2
Two kinds of protection
  • Mortality
  • Longevity (life annuities)
  • Combination

3
Simplest life policy
  • For one period
  • Premium PV of expected claim expenses
  • Premiums increase with age
  • mortality
  • adverse selection

4
Level premium concept
  • Two periods
  • Probabilities 0.01 and 0.02
  • Ignore expenses
  • Expected claims 10,000 and 20,000
  • Interest rate 10
  • Premiums 9090.91 and 18181.82

5
Level premium concept
  • Premium 1 13,397.13
  • First year mortality charge 9,047.41
  • Balance invested 4,349.72
  • Amount at the end of year 1 4,784.69
  • Premium 2 13,397.13
  • Second year mortality charge 18,181.82
  • Amount at risk at the end of year 1 995,215.31
  • Premium for this amount 9,047.41

6
Term Policies
  • 1 year, 5 year, 10 year . . .
  • Renewable term
  • Convertible term

7
Cash value policies
  • Cash value and reserve
  • Types of policies
  • Single premium whole life
  • Straight whole life
  • Limited pay whole life
  • Endowment
  • Universal
  • Variable

8
Participating policies
  • Policy holders dividends
  • Dividends as policy refunds

9
Classification
  • Ordinary life
  • Group life
  • Credit life
  • Industrial life

10
Annuities
  • Pure life annuities
  • Fixed and variable annuities
  • Self directed annuities
  • Equity indexed annuities

11
Taxation
  • Life insurance is a tax favored instrument
  • Death benefits not taxable
  • Investment income not taxable unless with drawn
  • Return of capital not taxed
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