Term life insurance and
endowment insurance
Richard MacMinn
1 Tuesday, November 15, 2011 Copyright MacMinn.org
Objectives
Consider the competitive pressures facing life
insurers
Consider how life insurers are responding to
competitive pressures through product design and
distribution
Define term and endowment life insurance
Describe the features of term life insurance
Describe and explain endowment life insurance
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The changing face of financial services
markets
Factors contributing to change
– International growth of life markets
– Confluence of economic, cultural, demographic
and technological factors
– Convergence in financial services
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Insurance company reactions
Potentially lower cost coverage
– Indeterminate premium plans
– More refined classification systems
– Provisions to encourage persistency
Increased flexibility
– Face value may be changed at any time
– Increased flexibility in premium payment
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Insurance company reactions
Greater disclosure
– The disclosure of the elements of the policy, i.e. how much
of the premium goes to mortality and expenses versus cash
buildup
– The transparency extends to annual transaction summaries
that allows the policyholder to monitor the financial results
and compare to policy illustration at time of purchase
Increased risk to consumers
– Price competition has motivated insurers to offer less liberal
guarantees and shift more risk to the consumer, e.g., in
variable life and annuity products
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Types of life insurance
Term life
Endowment
Whole life
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Term life
Nature of term life
– Renewability
– Convertibility
– Reentry
– Quotes
Limitations of term life
– Benefits
Indemnity cost is lower
Flexible and transparent
– Costs
It does not provide a savings instrument
There is a renewal risk at term
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Types of term life
Level face value Increasing term is equivalent to
– Increasing premium renewable term. Note the
classification and YRT rates in table
– Level premium
4-1
Life expectancy term
The life expectancy term provides
Term to age 65 protection for the life expectancy of
The family income policy is a
Non-level face value the insured term that provides a
decreasing given age and sex.
monthly income to generates
The level premium a surviving a
– Types
cash value which increases andrider to
The payor a certain age or a
spouse until benefit is usually for a
Mortgage protection term then decreases to zero at policy
a life period.
certaincontract on a juvenile. The
Payor benefit expiration. death benefit is just
decreasing
Family income policy sufficient to pay the premiums on the
juvenile life contract, i.e., until the
insured is 21.
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Endowment insurance
Nature of endowment
– Endowment insurance is equivalent to term life
plus a pure endowment
– Endowment insurance is equivalent to decreasing
term with increasing savings
Endowment policies provide the
face value upon death or the end The pure endowment policy would
of the term if the insured survives be the face value payment in the
until term event of survival till term
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Endowment insurance
Types of endowment
– Endowment contracts of 3-10 years are common in Asia.
– Single premium endowment policies are popular in part of Europe
– Long term endowment policies are popular in the UK as
companions to mortgage loans, i.e., preset to pay the loan balance
at term
– Retirement income policy provides the face value or cash value
which ever is greater at term
– Modified endowment policy is popular in some markets such as
Thailand. It provides periodic payments over the policy term which
are proportional to the insured amount plus the face value at term.
Uses and limitations
– The endowments have had difficulty competing with whole and
term policies in the US and increasingly elsewhere also
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Questions
Life insurers have actively responded to competitive pressures
in the financial services markets. How do the changes affect
life insurance from the savings and risk perspectives?
Reentry in term insurance allows life insurers to address
adverse selection. How do these provisions make term
insurance more attractive to consumers?
Explain the renewability and convertibility features of term
insurance.
Term and endowment are two forms of life insurance.
Compare and contrast the characteristics and objectives of the
two policy types.
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1. Insurers can offer lower-cost coverage
with the following approaches:
1. Indeterminate-premium
plans
2. More refined risk-
classification
3. Provisions to encourage
persistency
0% 0% 0% 0%
4. All of the above
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2. Which of the following statements about
term insurance is true
1. The insurance provides
protection for a specified
period of time.
2. Most policies can be renewed
for additional periods without
evidence of insurability.
3. Most policies can be
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converted to a permanent life
insurance policy.
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3. Decreasing term insurance is most
suited to meeting which of the following
needs?
1. funeral expenses.
2. educational funds.
3. mortgage payment.
4. retirement income.
5. none of the above. 0% 0% 0% 0% 0%
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4. Under the conversion privilege of a
convertible term life insurance policy
1. The insured may convert to
another term policy at expiration.
2. The insured may convert to
another term policy prior to
expiration.
3. the insured may convert to a
whole life policy prior to
expiration.
4. the insured may convert to a
whole life after expiration 0% 0% 0% 0% 0%
5. all of the above.
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