Business Finance 640 - Insurance and Risk
In this class, we review the basic methods of providing life insurance, yearly renewable term and level
premium, before turning to a discussion of the various types of term and whole life Insurance.
insurance, we look at yearly renewable term, various term periods of protection, such as 5-year term, and
Next, the most important variations of Whole Life will be discussed.
These include variable life, universal
life and variable universal life contracts.
While reviewing these variations, we will take a more detailed
look at universal life.
We will review the major characteristics of the universal life product and spend
some time understanding its limitations.
We will shift to the basic contractual provisions that appear in life insurance contracts. Ownership, entire
contract, incontestable, suicide, grace period and reinstatement and misstatement of age clauses are all
We will also discuss pr assignment and policy loans. We will also look at the exclusions
governing suicide, war provisions pertaining to beneficiary designation, change of plan, payment of
premium, and aviation.
We will review various dividend options, nonforfeiture options and settlement options. Finally, we will
review briefly the additional life insurance benefits that can be added to a policy. These include the
waiver-of-premium provision, guaranteed purchase option, accidental death benefit rider, cost of living
rider, and accelerated death benefits rider.
Review: Methods for Providing Life Insurance Protection
Yearly Renewable Term Method
Pure premium—determined by the death rate at each attained age
Prohibitively high cost at advanced ages
Level Premium Method
Level premiums are possible because the premiums paid during the early years are higher
than necessary to pay current death claims. The redundant premiums paid during the early
years plus compound interest are used to supplement the inadequate premiums paid
during the later years of the policy. Since the redundant premiums will be needed later, a
legal reserve is required.
Fundamental purpose of the legal reserve is lifetime protection. As the legal reserve
increases, the net amount at risk declines. As a result, the cost of insurance is reasonable
at all ages.