Life Insurance and Annuities - PowerPoint PPT Presentation


PPT – Life Insurance and Annuities PowerPoint presentation | free to view - id: 24be03-ZDc1Z


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation

Life Insurance and Annuities


Tax Treatment of Life Insurance. Death benefits are not taxed ... Term Insurance ... Endowment Insurance ... – PowerPoint PPT presentation

Number of Views:233
Avg rating:3.0/5.0
Slides: 26
Provided by: GregoryR157


Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Life Insurance and Annuities

Life Insurance and Annuities
  • Terminology
  • Types of life insurance products
  • Tax treatment of life insurance
  • Term insurance
  • Endowment insurance
  • Whole life insurance
  • Universal insurance
  • Variable insurance

  • Death benefit amount beneficiaries receive
  • Cash value amount of savings accumulation
  • Death protection amount of pure death
  • death benefit - cash value
  • Face amount stated amount of coverage
  • death benefit (for term, whole life, some
    universal life)
  • death benefit - cash value (for some universal
  • Cash surrender value the amount of money that
    the policyholder can withdraw (cash value -
    surrender penalty)

Life Insurance Products General Introduction
  • Term insurance
  • pure life insurance
  • Cash value life insurance
  • pure life insurance Savings accumulation
  • whole life
  • universal life
  • variable life
  • Variable universal life

Tax Treatment of Life Insurance
  • Death benefits are not taxed
  • Income tax is not paid on increases in cash value
    while the policy is in force
  • Upon surrender, income tax is paid on
  • Cash surrender value - sum of all premiums
  • sum of all policyholder dividends

Implications of Tax Treatment
  • Implicit returns on savings accumulation
  • Escape taxation if insured dies
  • Tax deferred if the policy is surrendered
  • Partially taxed if policy is surrendered
  • Amount which is taxed is less than implicit
    return b/c part of premiums is cost of death

Term Insurance
  • Typically provides pure death protection over a
    fixed term, usually one year or five years. There
    is no savings feature and therefore no cash
    surrender value.
  • Data
  • 1/4 of policies
  • almost half of death protection purchased
  • Guaranteed renewable
  • Premium increases over time. Why?

Life Insurance Pricing
  • Ignore expenses and risk load
  • gt focus on net premiums
  • Use mortality table
  • Probability of dying at age x conditional on
    living through age x-1
  • Example Probability of male dying at age 40
  • Assume
  • Premiums paid at beginning of year
  • Claims paid at end of year

Pricing 1-Year Term
  • Find fair premium for 100,000 1-year term for 40
  • Interest rate 10
  • Insurers cash flows
  • Beg. of Year End of Year
  • 100,000 with
    prob 0.00302
  • Loss
  • 0
    with prob. 0.99698
  • Expected claim cost ________
  • Premium Present value of expected claim cost
  • __________

Pricing 1-Year Term
  • Find fair premium for 100,000 1-year term for 41
  • Interest rate 10
  • Insurers cash flows
  • Beg. of Year End of Year
  • -100,000 with
    prob ____________
  • Premium
  • 0
    with prob. ____________
  • Expected claim cost ___________
  • Premium Present value of expected claim cost
  • ____________

Pricing 1-Year Term
  • Premium increases as probability of dying

Pricing 2-Year Term
  • Find fair premium for 100,000 2-year term for 40
  • Insurers claim costs
  • Beg. of Year 1 End of Year 1 End of Year 2
  • -100,000
  • with prob 0.00302 with prob x
  • 0 0
  • with prob. 0.99698 with prob 1-x

Pricing 2-Year Term
  • What is x? it is the probability of a 40
    year-old dying in his 42nd year?
  • Mortality table
  • Number Number
  • Age of People of Deaths
  • 40 937723 2832
  • 41 934891 3076
  • Probability of 40 year-old dying in 41st year
    _____ ______
  • Probability of 40 year-old dying in 42nd year
    _____ ______

Pricing 2-Year Term
  • Single premium
  • Level Premium

Endowment Insurance
  • Pays face amount if the insured dies, or if the
    insured survives the policy period
  • It is similar to a saving account
  • The US no longer grants tax advantage to
    endowment policies unless they have a very long
    duration, such as whole life insurance.

Whole Life Insurance
  • Policy period ends when insured reaches 100
  • Equivalent to endowment policy to 100
  • Premiums
  • single premium
  • limited pay a level premium paid for a 10-year
    or 20-year period
  • continuous premium level premium continue until
    the policyholder dies, surrenders the policy, or
    reaches the age of 100 (whichever comes first)

Whole Life Insurance
  • Premiums generally do not increase over time
  • But probability of dying increases over time
  • gt higher upfront premiums than with term
  • Policyholder prepays part of the cost of future
    death protection
  • entitled to prepayments if policy is surrendered
  • this is the cash value (savings accumulation)

Whole Life Insurance
  • If insured dies,
  • beneficiaries receive face amount
  • death protection cash value
  • Structured so
  • cash value ? over time
  • death protection ? over time

Whole Life Insurance
Participating Policies
  • Can (and usually does) pay annual dividends
  • always with mutual companies
  • often with stock companies
  • Why? - premiums based on conservative assumptions
  • Key assumptions interest rate levels and
    mortality rates
  • These variables are correlated across
  • Insurers methods of dealing with correlated
  • Bear the correlated risk and hold a lot of
  • Share correlated risk with policyholders
  • Illustrated versus actual dividends

Other Whole Life Policy Provisions
  • Surrender Options
  • Take cash value
  • Use cash value as a single premium for
  • paid up whole life
  • term policy
  • Policy loans
  • borrow against cash value
  • interest now varies with market rates
  • in 1970s 80s, fixed rate gt disintermediation
  • Front-end expense charges
  • gt Cash value grows slowly at first
  • gt Implicit return on savings accumulation
  • initially low

Universal Life
  • Similar to whole life
  • Main differences
  • Greater flexibility in premium payments
  • Cash value does not follow a fixed schedule it
    varies with
  • policyholders premium payments
  • insurers expense and mortality charges
  • rate insurer uses to credit interest to cash
  • minimum rate usually guaranteed
  • rate often linked to short term interest rates

Factors Affecting UL Cash Value
Death Benefit Options with Universal Life
  • Level death benefit (as with Whole Life)
  • Death benefit varies with cash value

Death benefit
Death benefit
Cash value
Cash value
Variable Life
  • Similar to whole life
  • Main differences
  • Cash value does not follow a fixed schedule it
    varies with
  • return earned on portfolio of mutual funds chosen
    by policyholder
  • Death benefit
  • minimum is guaranteed, but varies with cash value

Overview of Annuity Contracts