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Life insurance and annuities

Life insurance and annuities. Chapter 12. Two kinds of protection. Mortality Longevity (life annuities) Combination. Simplest life policy. For one period Premium = PV of expected claim + expenses Premiums increase with age mortality adverse selection. Level premium concept.

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Life insurance and annuities

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  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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