ch13 - Nondepository Financial Institutions Chapter 10 Life...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Nondepository Financial Institutions Chapter 10 Life Insurance Companies Oldest type of intermediary in the U.S. 1759 in Philadelphia (now called Presbyterian Ministers’ Fund) Invest funds obtained through the sale of policies. Primary investments: Long term taxable, not highly marketable securities: corporate bonds and commercial mortgages. Income paid to policy holders is tax exempt - return on the policy holders investment Insure against dying too soon and living too long. Life Insurance Companies Regulation of life insurance companies includes: Sales practices Premium rates Allowable investments Usually overseen by a state insurance commissioner, who might also be the state banking commissioner Types of Life Insurance Policies Whole Life Insurance Constant premium that is paid through entire life of policy Build up cash reserves or savings which can be withdrawn as borrowing or outright by canceling the policy Savings component pays a money market rate of interest that changes with market conditions Types of Life Insurance Policies Term Life Insurance Pure insurance with no cash reserve or savings element Premiums are relatively low at first but increase with the age of the insured individual Universal (variable) Life Variation on whole life policy “Unbundle” the term insurance and tax-deferred savings component Owner can elect how to allocate the savings component among a menu of investment options, thereby potentially earning above money market rates Life Insurance Companies Based on actuarial tables, life insurance companies have ability to predict cash flow Typically insurance companies use excess funds to buy long-term corporate bonds and commercial mortgages Higher yields Unlikely of having to sell prior to maturity However, lately they have branched out into riskier ventures such as common stock and real estate Life Insurance Basics Public makes payments in exchange for protection Companies lend out the funds collected. Companies use the interest and dividend income received to pay benefits to policyholders Insurance companies have a reasonably predictable stream of payments to policy holders distributed over time. Dealing with Asymmetric- Information Problems in Insurance Limiting adverse selection Restricting the availability and quantity of insurance. Limiting moral hazard in insurance Deductible: A fixed amount of an insured loss that a policyholder must pay before the insurer is obliged to make payments.to make payments....
View Full Document

This note was uploaded on 09/07/2011 for the course ECON ECO 201 taught by Professor Unknown during the Spring '09 term at New York Institute of Technology-Westbury.

Page1 / 42

ch13 - Nondepository Financial Institutions Chapter 10 Life...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online