1. Chapter Introduction to life insurance
ACTSC 232 Introduction to Actuarial Mathematics
Department of Statistics and Actuarial Science
University of Waterloo
Fall 2011
Instructor: Chengguo Weng
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Life insurance
A contract between the insurance buyer and an insurer (insurance
company), where the insurer agrees to pay certain amount of benets upon the
occurrence of an individuals or some individuals death or survival. In return,
the buyer agrees to pay a stipulated amount of money to the insurer.
Def:
Policy:
such a contract is also called a policy.
Policyholder:
the buyer.
the person whose life status is used to determine whether the
benets should be paid or not; often coincide with the policyholder (we
assume it is the case throughout the course).
Insured:
Beneciary:
the person who receive the insurance benets.
the predetermined lump sum, delivered to the beneciary
upon the occurrence of the death or survival stipulated in the insurance
policy.
Sum insured:
the amount of money paid by the buyer (policyholder) to the
insurer is called the premiums; paid at regular intervals or in a lump sum.
Premiums:
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Life insurance:premiums
Single premium insurance policies
The buyer makes a single payment to the insurer.
Regular premium insurance policies
The policyholder pays at regular intervals, e.g. annually, monthly, etc.
Always paid in advance.
Dependent on the insureds surviving to the payment date.
Usually level, sometimes decreasing or increasing in certain patten.
Variable premium policies
Variable premium life insurance is a policy that allows premium payments
to vary, within certain limits, at the option of the policyholder. In return, the
insurance benets for the policyholder also vary with the premium
payments.
e.g. universal life insurance.
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Life insurance and annuities
Examples of life insurance companies in Ontario
Sun Life Assurance Company of Canada
Manufacturers Life (Manulife) Insurance Company
Empire Life Insurance Company
AIG Life Insurance Company of Canada
Great-West Life Assurance Company
The Economical Insurance Group
Dominion Life Insurance Company
etc.
Life annuity V.S. life insurance
the benet is paid as a single lump sum either on the death
or survival of the insured.
Life insurance:
the benet is in term of a regular series of payments,
conditional on the survival of the insured.
Life annuity:
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Life insurance
Traditional life insurance contracts (main
objects of this course)
Term insurance
pays a lump sum benet on the death of the insured, provided death occurs
before the end of a specic term.
Whole life insurance
pays a lump sum benet on the death of the insured whenever it occurs.
As term insurance but without time limit.
Endowment insurance
offers a lump sum benet paid either on the death of the insured or at the
end of a specied term, whichever rst.
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Life insurance
Modern life insurance contracts
Universal Life insurance
combines investment and life insurance. The policyholder determines a
premium and a level of life insurance cover. Some of the premium is used
to fund the life insurance; the remainder is paid into an investment fund.
Premiums are exible, as long as they are sufcient to pay for the
designated sum insured under the term insurance part of the contract.
Equity-linked insurance
Other insurance contracts
pay xed lump sum benets on diagnosis of
specied illness with a specic term.
Critical illness insurance:
Income protection
Long-term care insurance
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Pensions
Usually an annuity provided to the employee in retirement.
A typical employer sponsored pension plan
Employer and employee pay contributions to a pension funds during the
employees working lifetime.
The proceeds will be used to fund employee in retirement.
Two designs:
(DC)
The contributions are certain, but the benets may be uncertain.
Dened Contribution
Proceeds at retirement depend investment performance.
Uncertain income in retirement for employee.
(DB)
The benets are certain, but the contributions vary depending on
investment performance.
Dened Benets
More will be introduced in course ACTSC 453 (Basic Pension Mathematics).
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Insurable interest
A person has an insurable interest in something when loss or damage to it
would cause that person to suffer a nancial loss or a substantial metal harm.
your own house V.S. your neighbors
For purposes of life insurance, everyone is considered to have an insurable
interest in his/her own life, as well as the lives of their spouses and dependents.
It is disallowed by law to buy a life insurance on some stranger, or public gure.
Basic requirements in all types of insurance
The buyer has an insurable interest in subject of the insurance
The benet is no larger than the realization of the potential nancial loss
In context of life insurance:
The more dependents, the more insurable interest in his/her life
The more possession, the more insurable interest in his/her life
The more insurable interest an applicant of insurance has, the more desirable for
the insurance company.
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Actuaries Role
Maintain solvency and manage risk for policies
Solvency is the ability of an entity to pay its debts with available cash.
Determine adequate premiums
Oversee appropriate investment strategy
Determine appropriate level of capital required for the uncertain future liabilities
(e.g. reserve)
Develop new insurance products
Calculate fair surrender values
The cash value of an insurance contract, also called the cash surrender value
or surrender value, is the cash amount offered to the policyholder by the
issuing life carrier upon cancelation of the contract.
etc.
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