Life_Insurance_and_Annuities (part 1) stdt

A the policyholder reduces the annual premium payment

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Unformatted text preview: nd remain at the lower level. (c) Researchers discover a cure for cancer five years after the policy is issued. Death Benefit Options with UL Level death benefit (as with WL) Provision to automatically increase the death benefit if the cash value approaches the policy’s face amount. Why? Variable death benefit: Variable Death benefit increases as cash value Death increases increases The amount of net death protection equals the face amount of the policy at all times Net death protection = Total death benefit – Cash value Disintermediation with UL In high interest rate environments, policyholders may In choose to take a policy loan on their UL policies. choose This leads to disintermediation where the higher UL This interest rate gets credited on monies that have been borrowed borrowed To reduce this, policies may pay a lower interest rate To on borrowed funds on Provisions Protecting Policyholder Incontestable clause: Usually after 2 years validity may not be contested. Grace period: Usually 30 days to pay premium after due date. Non-forfeiture provisions: Details on Cash Surrender Values. Reinstatement clause: Prove insurability and pay past due premiums; 5 year option. Misstatement of Age/Sex: Adjust the amount of insurance paid. Provisions Protecting Insurer Suicide Clause: Usually 2 years. Exclusions: Very few, but may have one for aviation (e.g. military pilot). Provisions Providing Policyholder Flexibility Beneficiary Clause Primary vs. contingent Revocable vs. irrevocable Assignments: Absolute (complete transfer of all rights) Collateral (for a loan) Tax treatment of Life Insurance Death benefits are not taxed Income tax is not paid on increases in cash value Income when the policy is in force when Upon surrender, income tax is paid on a portion of Upon the Cash Surrender Value (allows a policyholder to defer income taxes on the returns earned on the savings invested with the insurer) savings Implications of Tax Treatment Implicit returns on savings accumulation Escape taxation if insured dies Tax deferred if the policy is surrendered Partially taxed if policy is surrendered Amount which is taxed is less than implicit return Amount because part of the premium covers the cost of death protection death Life Insurance Pricing Ignore expenses and risk load focus on net premiums focus Use mortality table Probability of dying at age X conditional on living to Probability age X Example: Probability of male dying at age 40 = Example: 0.00302 0.003...
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This document was uploaded on 02/26/2014 for the course BUSINESS 317 at University of Calgary.

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