Ba96-M2L4Notes - Chapter 16 Life Insurance and Long Term...

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March 19, 2007 Chapter 16 Life Insurance and Long Term Care Planning Overestimate things that are salient and important to you o Ex. People think airplane crashes are the biggest transportation danger, but it actually is driving a car o Insure things with low frequency, high severity Mortality Risk and Insurance For much of human history, 35-40 years expected life span o 2 major challenges o Make it through childhood o Make it through military age Mexican children killed by diarrhea o 600 tons of human feces in air o Larger city than Chicago, no sewer The Death Clock ( ) o Guess by age, weight, smoking, and drinking habits for natural death o Accident statistics are harder to find o HIV risk for Latinos and African American increasing in California o Risk depends on activities Unemployment rate 4.4% o 30-50% if high school degree only o 50-60% if no high school degree Sexually transmitted diseases o 1 in 4 women get genital herpes o 1 in 5 men get genital herpes o Back when the Professor was a teenager, 4% had it In Chapter 9, we evaluated expected loss: o = Frequency x Severity o = Likelihood of event happening x Cost if it does Unlike property and liability risks, death is certain to occur. The only question is when. o What is the cost of the loss when it does occur? The person who has died is not the one who incurs the loss. How does Life Insurance Work? Aggregate large pool of people greater than what has to be paid out o Pay out 100% more than they receive o Make money from investments
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Insurers collect premiums from many people o When some of the members of the pool die in a given period, their beneficiaries receive the face amount of their policy Mortality risk of a large group is predictable (See mortality table in text) What kinds of risk classification would you expect an insurer to use here? Determinants of Premiums Premiums higher if your risk of dying is higher o Premiums has to rise as risk gets higher Point in time when all bets are off? o After 2-3 years, locked in o State mandate o So insu rance won’t argue claims 15 years out What individual factors increase premiums? Age, smoker, health problems, risky profession or hobby What economic factors increase premiums?
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