CMFAS Module 9: Life Insurance and Investment Linked Policies
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CMFAS M9 Exam Objectives �� ���� ��������� ��� �������������:
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Good To Know Exam mode: mode : Computer Screen Screen Duration
: 2 Hrs
MUST Bring NRIC or Passport on the day of exam!
Queest Qu stio ions ns : 10 100M 0Mul ulti tipl plee Cho hoic icee Que uest stio ions ns Passing Mark
: 70% (70 Questions)
1 mark for each right answer No mark deducted for wrong wrong and blank answer
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CMFAS M9 Question Types Type of Questions 1. The majority of exam questions test the ability to recall materials from the textbook. .
.
3. Questions that test the understanding of: i. the underlying insurance principles and concepts; ii. products
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Chapter 1
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Risks and Insurance
Pg 2
Definition of Risk
Risk is defined as “exposure to the chance of injury or loss, a hazard or dangerous chance” – Dictionary.com Speculative Risk
Involves 3 possible outcomes: loss, gain or no change Example: Investing Pure Risk
No possibility of gain: Either loss or no loss Example: Natural Disaster 6
Risks and Insurance Characteristics of Insurable Risk
• Loss occurs by chance • Loss must be definite • L
m
i nifi
n
• Loss rate must be predictable • Loss must not be catastrophic to the insurer
7
Pg 3 - 4
Risks and Insurance Dealing with Risk Remember ACTA!
• Avoiding the risk
• Transfer the risk • Accept the risk
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Pg 4-5
Risks and Insurance
Pg 5
3 Types of Personal Risk
• Premature death • Outliving resources • P
9
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Risks and Insurance Basic Life Insurance Terms You Should Know
• Death Benefit • Applicant • P li
wn r
• Life Insured • Third Party Policy • Sum assured • Beneficiary
10
Pg 6
Risks and Insurance
Pg 7
Hazards
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Risks and Insurance
Pg 8
Anti Selection and Underwriting
• Anti Selection/Adverse Selection People who have more to lose, tend to seek more insurance
•
n
rwri in
Method of minimising anti-selection problems. Can classify risks as: 1) Standard
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2) Sub-standard
3) Postponed/Declined
Risks and Insurance
Pg 9-10
Various Life & Health Insurance Products
• Life Insurance Policies: 1) Term
2) Whole Life
3) Endowments
4) ILP’s
• Annuities Different types. The most common being “till end of life” annuity
• Health Insurance Products Designed to cover hospital/ medical/ surgical/ emergency accident outpatient expenses 1) Private Health Insurance
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2) CPF Board
Risks and Insurance
Pg 10-11
Life Insurance Financial Protection against:
• Premature Death • Outliving Resources •
i kn
/ Di
1) Critical Illness
l m n 2) Medical Expenses
4) Disability Income
3) Hospital Cash
5) Long Term Care
• Businesses Keyman Insurance being the most common form
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Risks and Insurance
Pg 13-16
Basic Life Insurance Principles
• Law of Large Numbers As the #of people increase, the risk to the insurer decreases
• Prin i l
f
m
F ih
Applicants are expected to: 1) Disclose all material facts 2) Not to make any misrepresentation of material facts
Insurers are also expected to abide by this principle
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Risks and Insurance
Pg 16 - 18
Insurable Interest Requirement • Compulsory in all contracts of Life Insurance It exists if:
2) He/she will suffer a loss or detriment with the insured’s death
• Why is it necessary? 1) It minimizes the moral hazards in insurance 2) Proposer is expected to safeguard the subject matter 17
Risks and Insurance
Pg 16-20
Insurable Interest • When must it exist? General Insurance policies: At the time of the loss Life Insurance: Only during inception , not required during death
• Examples inlude:
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1) Own life
2) Another Person Whom One is
Dependant On
3) Trustees & Beneficiaries
4) Creditors & Debtors
5) Key-person Insurance
6) Spouse
7) Child or ward
Risks and Insurance
Pg 19
A Valid Trust Structure should meet the following conditions
Life Insured is the Settlor
Applicant is the Trustee of the Trust
Mr Davids
Mr Ravi (Lawyer)
Trustee applies for whole life policy on the life of Mr Lim (Settlor).
Beneficiaries of this policy are Mr Lim’s wife and son.
Mr Lim consents to the purchase of the whole life policy
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Any Beneficiary has insurable interest on Settlor Wife and Son
Beneficiary is Settlor’s spouse
OR
Settlor’s child / ward below 18 years old
OR
OR
Any person whom Settlor is partly / wholly dependant on
Risks and Insurance
Pg 19
A Beneficiary of a Trust requires the following conditions to be met Life Insured is the relevant Beneficiary
Applicant is the Trustee of the Trust
Mr Roberts
Mr Ramesh (Lawyer)
Applied for term policy on the life of Mrs Roberts (Relevant Beneficiary in Trust).
Beneficiary of this policy is Mr Roberts.
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Mrs Roberts consents to the purchase of the policy.
Relevant Beneficiary’s spouse Relevant Beneficiary’s child / ward below 18 years old
Any Beneficiary with insurable interest on relevant Beneficiary Wife and Daughter OR
OR
OR
Any person whom relevant Beneficiary is partly / wholly dependant on
Risks and Insurance
Pg 21-24
Structure of the Singapore Insurance Market • Buyers, • Sellers (Reinsurers)
1) Representative of a Life Insurance Company (Insurer) 2) Representative of a Bank or Other Financial Institution 3) Representative of a Licensed And Exempt Financial Adviser 4) Introducers of Life Insurance Advisory Services
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Risks and Insurance
Pg 21-24
Other Relevant Organisations • Rating Agencies They provide independent assessment and opinion on the overall financial capacity or credit worthiness of financial institutions that issue . They basically reflect the rating agency’s opinion on the credit worthiness of the financial institution. In the case of rating an insurer or re-insurer, the agency will make their decision based on a broad range of factors. Not all insurance and reinsurance companies are rated as they are not compulsory for them to get it. 22
Risks and Insurance
Pg 24-25
Other Relevant Organisations • Market Associations They are trade associations in Singapore representing insurance com anies and intermediaries. Exam les of such members are:
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•
Association of Financial Advisers [AFA(S)]
•
Life Insurance Association of Singapore (LIA)
•
Singapore Reinsurer’s Association (SRA)
Risks and Insurance Financial Industry Disputes Resolution Centre (FIDReC) • •
Affordable, one stop centre for customers ,
•
For claims up to $50,000 (consumers and banks only)
•
Individuals or sole proprietors accepted
FIDReC’s Dispute Resolution Process 1) Mediation (1st Stage) 2) Adjudication (2 nd Stage) 24
Pg 25-26
Risks and Insurance
Pg 27
MoneySENSE Programme • Launched in 2003, brings initiatives to enhance the basic literacy of consumers
1) Basic Money Management 2) Financial Planning 3) Investment Know-How
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Quiz Time! A class of relationship in which insurable interest needs to be proven is when a: A. person insures his own life B. creditor insures the life of his debtor C. wife buys a policy on the life of her husband D. guardian buys a policy on the life of her ward who is a minor
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Quiz Time! QUESTION: One of principles of Utmost Good Faith
ANSWER: Disclosure of all material facts, Not making any Misrepresentation of material facts QUESTION: Name TWO personal risks
ANSWER: Premature Death, Outliving Resources, Poor Health (Sickness or Disability) QUESTION: How many classes of Risks are there as a result Of Underwriting? Name all
ANSWER: 4. Standard, Sub-Standard, Postponed, Declined 27
Chapter 2 Setting Life Insurance
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Setting Life Insurance Premium
Pg 30-35
Actuaries consider the following: • Mortality & Morbidity Rates (Fig.2.1) • Investment Income
• Gender (Difference in Premium Rates) • Smoking Status • Sum Assured • Premium Frequency (RP vs SP vs Yrly Renewable vs Ltd Prem) 29
Setting Life Insurance Premiums
Pg 35-36
Suitability of Frequency and Mode of Premium Payments • Premium affordability If customer has not set aside sufficient money to buy life insurance policies, please don’t attempt to sell him a Single Premium Policy. The coverage will not be enough.
• Product suitability
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Quiz Time! QUESTION: Name any 3 factors actuaries must take note of when setting life insurance premiums
1) Mortality and Morbidity Rates 2) Investment Income 4) Gender 5) Smoking Status 6) Sum Assured 7) Frequency of Premium Payments Can be found on Pg 30
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Quiz Time! QUESTION: How is Gross Premium Calculated?
ANSWER: Gross Premium = Net Premium + Loading (Expenses)
premiums for a specified period of time. What type of premium payment is this called?
ANSWER: Limited Premium Can be found on Pg 35 32
Chapter 3 Classification of Life Insurance Products
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Classification of Life Insurance Pdts Hmm, how do I classify soooo many products?
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Classification of Life Insurance Pdts
Pg 38
Ways of classifying: • By Statutory Insurance Fund – insurers to maintain separate insurance funds for ILP and Par/Non-Par policies.
• B Pr mi m T
Sin le Recurrent Re ular Yearl
Renewable, Limited Payment Policy)
• By Product Type • By Ownership (Single Life, Joint {First-To-Die vs Last- Survivor}, Third-Party, Group Policy)
35
Classification of Life Insurance Pdts
Pg 38-39
S17 of the Insurance Act (Cap. 142): “Insurers who are registered to carry on insurance business are required to maintain insurance funds in respect of their insurance business” o ensure a the assets and liabilities of the shareholders and those relating to the insurance businesses are kept separate! 36
ILP’s cannot be mixed with Par & Non Par Plans
Classification of Life Insurance Pdts
Pg 39
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Classification of Life Insurance Pdts
Pg 40-41
Classification by Premium Type • Single Premium – Policy is paid at the beginning of the policy term in one lump sum
• Recurrent Sin le Premium - It allows the olic owner to make single premium payments on a regular basis
• Regular Premium – It allows the policy owner to pay premiums on a yearly, half yearly, quarterly or monthly basis
38
Classification of Life Insurance Pdts
Pg 40-41
Classification by Premium Type • Yearly Renewable Premium – Only applicable to Yearly Renewable Term policies. The premium upon renewal is based on the life insured’s attained a e
• Limited Premium Payment – Applicable to policies where the policy owner needs to pay premiums only for a specified number of years or a specified age
39
Classification of Life Insurance Pdts
Pg 41-43
Classification by Ownership Single Life Policy
Most common type of insurance policy issued
•
As policy only covers one life, hence the name of the policy
•
Joint Life Policy •
•
•
40
Generally used to cover husband and wife (to cover a loan) First-to-die Life Insurance Policy pays on the death of one of the insured’s Last Survivor Life Insurance Policy pays out only on the death of the second life insured
Classification of Life Insurance Pdts
Pg 41-43
Third-party (life of another) policy •
•
•
Usually issued to the husband on the wife’s life and vice versa or parent on child’s life One of the parties may not be covered under the policy e.g. Husband = policy owner, wife = life insured The cover for the two parties differs e.g Father buys ayor ’s ene
r er,
=
e nsure
Group policy •
•
•
41
Multiple employer groups such as trade associations and labour unions; Members of professional associations or affinity groups (such as membership clubs); and Debtor-creditor groups which generally consist of a credit granting institution such as a bank and its debtors
Classification of Life Insurance Pdts
Pg 43
Characteristics of Group Life Insurance • Master Contract – Issued under a single contract called the “Master Contract”. Kept by policy owner. When an insured member dies or leave the rou , onl his covera e is terminated. They main plan goes on as it under the master contract
• Minimal Underwriting Requirements – Made available to the participating employees with simpler medical underwriting if the group size is large. Medical examination is only required where the sum assured exceeds the “free cover” limit
42
Classification of Life Insurance Pdts
Pg 43
Characteristics of Group Life Insurance • Experience Rating – Usually underwritten based on past claims experience.
•
–
.
,
thus save on admin costs
• Plan Continuation – It is usually renewable by the employer on a yearly basis
43
Classification of Life Insurance Pdts
44
Pg 44
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Classification of Life Insurance Pdts Group Life Insurance Normally Group Life Insurance can be written as: 1)
Term Life Insurance
2)
Whole Life Insurance
3)
Endowment Insurance
Since Group Term Life Insurance has the greatest appeal to employers and is sold by most insurers in Singapore, we will discuss only Group Term Life Insurance
45
Pg 45
Classification of Life Insurance Pdts
Pg 45
Group Term Life Insurance
•
Yearly Renewable Term Insurance Policy
•
Premiums varies with the size and experience of Group on
•
Just a simple health declaration needed if the group is small
Group Term Life Insurance (Features) 1) Coverage Mostly 24-hours worldwide coverage, with certain exclusions. Usually up to age 65-70 and covers Death and 46
TPD
Classification of Life Insurance Pdts
Pg 45
Group Term Life Insurance (Features) 2) Extended Benefit Provides continued coverage for 12 months even though the employee leaves the company, usually on the condition that: a) Employee remains unemployed b) Employer notifies the insurer within (usually 14) days from the date of termination c) Master policy is in force
47
Classification of Life Insurance Pdts
Pg 46
Group Term Life Insurance (Features) 3) Riders Allows for the provision of riders such as: 1) Critical Illness
2) Accidental Death & Dismembermen
3) Hospital & Surgical
4) Disability Income
4) Sum assured According to rank OR Number of times of basic monthly salary
48
Classification of Life Insurance Pdts
Pg 46
Group Term Life Insurance (Features) 5) Premiums Paid on annual basis. Grace period is usually 30/31 days from annual premium due date.
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Classification of Life Insurance Pdts
Pg 47
Group Term Life Insurance (Features) 6) Commencement of cover Coverage normally commences at the start of employment. Covers only people who are “actively at work”
7) Assignment of Policy NO third party assignment allowed
8) Termination of Coverage a) When employee reaches specified age b) Employee retires or gets terminated
50
Classification of Life Insurance Pdts
Pg 47
Group Term Life Insurance (Features) 9) Termination of Coverage c) Employee transferred to work overseas during which he is no longer under Company payroll d) Temporary leave of absence, vacation without pay, sick or injured for more than 6 months e) Employer does not pay premium within grace period f) Insurer or employer decides not to continue with policy *Reinstatement usually allowed. Terms & conditions apply
51
Classification of Life Insurance Pdts
Pg 47
Group Term Life Insurance (Features) 10) Claims procedure Documentation needed: •
Death claim form (1 by employer and 1 by attending physician)
52
•
Copy of Death Cert
•
Copy of payslip
•
Police report (if applicable)
•
Incident report (if applicable)
Classification of Life Insurance Pdts Group Term Life Insurance (Features) 10) Claims procedure Documentation needed: •
TPD claim forms (1 by employer and 1 by attending physician)
53
•
Copy of payslip
•
Copy of NRIC (certified by employer)
Pg 48
Quiz Time! Under a Last Survivor Life Insurance policy: A. death benefit is payable on the second death B. death benefit is payable on both deaths, in C. income benefits are payable after the first death and last until the second death D. annuity benefits are payable after the first death and last until the second death
54
Quiz Time! QUESTION: Name the 2 kinds of contribution plans for GTL Policies
ANSWER: Contributory & Non-contributory QUESTION: How are the sum assured for GTL Policies determined?
ANSWER: According to rank, according to number of times of basic monthly salary 55
Chapter 4 Traditional Life
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Traditional Life Insurance Products ���� ��������� � ����� ���� � D��������� ���� � ������ �� ��� � ���� ���������� � �� �������
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Pg 50-59
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Traditional Life Insurance Products Inception of Policy
What happens if he dies?
Pg 50-59
Policy Expiry Date
Term Policies
58
Policy Term No Cash value Nothing is payable if the insured is No Policy Loan alive after policy expiry No bonus payable Premium is the lowest Premium is usually fixed EXCEPT for e.g. CPF Dependants’ Increasing Term and Renewable Term Protection Scheme Insurance
Classification of Life Insurance Pdts
Pg 50-51
Features of Term Insurance •
Covers the insured against death during the policy term
•
Non participating = no bonus payable on death
•
Duration of cover is only for period specified at inception. Once specified period is up, policy expires
•
Policy lapses if premium is not paid within grace period
•
Most insurers offer TPD coverage and certain riders which can be attached to the policy
59
•
No cash value accumulation
•
No policy loan feature
Classification of Life Insurance Pdts
Pg 51
Features of Term Insurance •
No automatic premium loan
•
Premium cost is the lowest compared to other types of life insurance
•
Death benefit is aid in a lum sum
•
Upon TPD, the sum assured is paid either in a lump sum or in installments.
Example of Term Insurance is the CPF’s Dependant’s Protection Scheme (DPS). The DPS covers death and TPD and is renewable yearly up to age 60. 60
Traditional Life Insurance Products Example: A10-Year S$100,000 Level Term Insurance Policy
Level Death benefit payable
S$100,000
Pg 50-59
Nothing is payable if the insured survives to the end of the policy term
Policies S$0 1
Policy Term
10 (end of policy term)
Note: Both the death benefit and the premium remain level throughout the term of the policy 61
Traditional Life Insurance Products
Pg 50-59
Example: A10-Year S$100,000 Decreasing Term Policy Death Benefit
S$100,000
S$0 1 1. 2. 3. 4. 62
Policy Term
10
Based on observation, what happens to the sum assured over time? Under which situation will an insured need a Decreasing Term Policy? Will the premiums reduce as the sum assured is reduced periodically? When will the premium stop but coverage can still continue?
Traditional Life Insurance Products
Pg 50-59
Fig 6.10 – 10-Year S$100,000 Increasing Term Insurance Period of Benefit Payment
S$150,000 Death Benefit increasing at 5% per annum
S$100,000 1
Policy Term
10
1. What happens to the death benefits? 2. Why do you think the client need an Increasing Term Insurance? 3. Will the premium be increased at each increase of sum assured? 63
Traditional Life Insurance Products
Pg 50-59
Example: Exercising The Renewable Option For a 5-Year Renewable Term Insurance Policy Conditions allowed for renewal: Expiry date DOES NOT EXCEED a specified age Premium MUST BE PAID at renewal Pay a higher premium at EACH RENEWAL due to his ATTAINED AGE
Policy Inception Date 1/1/2005 64
Renew w/o evidence
Policy Expiry Date
New Policy Expiry Date
31/12/2009
31/12/2014
Traditonal Life Insurance Products
Pg 50-59
Yearly Renewable Term (YRT) insurance: Depending on policy terms, client may not be able to renew the policy after age 70.
$ Premium
30
31
32
33
34
35
36
1. What is the advantage and disadvantage of renewable option? 2. To discourage client from renewing such policy indefinitely, what is one of the conditions the insurers may rely on? (ans on pg 56) 65
70
Traditional Life Insurance Products
Term Policy
Change or Convert w/o evidence of insurability
Whole Life Policy
Pg 50-59
Suitable for clients who prefer permanent insurance but do not have the budget at the time of purchase
Attained Age Conversion
When term coverage is converted to permanent insurance under attained age conversion, the renewal premium rate is based on the attained age of the insured. Original Age Conversion
The date of the conversion is considered to be the date on which the policyowner purchased the original term policy. The premium would be based on the earlier age. Policy owner usually needs to make a large cash outlay at time of conversion 66
Traditional Life Insurance Products
Term Policy
Change or Convert w/o evidence of insurability
Whole Life Policy
Pg 50-59
Suitable for clients who prefer permanent insurance but do not have the budget at the time of purchase
Conditions allowed for conversion are: 1. Anytime during the policy term or before he reaches a specified age, depending on whichever is the earlier 2. Must be done in writing on a form as prescribed by the insurer accompanied by the premium for the new policy based on the insured’s attained age 3. Sum Assured for the new policy < = Term policy 4. New policy will include all limitations of risk (exclusions) applicable to the Term policy 67
Classification of Life Insurance Pdts
Pg 60
Suitability of Term Insurance Term Insurance is suitable either the need for protection is: •
Purely Temporary
•
Permanent, but the insured cannot temporarily afford the premiums for permanent insurance
68
Traditional Life Insurance Products
Pg 61
Whole Life Insurance Plans • Nature of WL Insurance 1) Provides for the payment of the policy’s face value + bonuses if applicable upon the death of the insured. 2) Provides coverage for the whole life of the insured. Hence the name 3) Known as Ordinary Whole Life or Limited Payment Life 4) Riders allowable to be attached 5) TPD coverage is normally included as part of the policy or as a rider 69
Traditional Life Insurance Products
Pg 61
Definition of Total & Permanent Disability An insured is said to be suffering from TPD if he cannot ever perform any work , occupation or profession.
He is also considered to have TPD if he suffers from one of the following: 1) Loss of sight of both eyes 2) Loss of both limbs; and/or 3) loss of sight of one eye and loss of one limb
70
Traditional Life Insurance Products
Pg 61
Whole Life Insurance Plans • Features of WL Insurance
1) Covers against death, for whole of insured’s life 2) Normally coupled with a TPD benefit/rider. TPD claims either in lump sum or installments – capped at $2M/insurer 3) Accumulates cash value (usually after 3 years) 4) Riders allowable to be attached 5) Premium higher than term policy. Fixed amount throughout premium term on a regular basis 71
Traditional Life Insurance Products
Pg 61-62
Whole Life Insurance Plans • Features of WL Insurance 6) Premiums payable throughout the policy term or for a limited period
7) Death benefit is paid in one lump sum
8) Can be a participating or non-participating policy
72
Traditional Life Insurance Products
Pg 61-63
Whole Life Insurance End of Policy Term
Inception of Policy
AGE 30 If insured dies at 60, policy pays out at age 60, premium payment stops. Policy ceases.
73
60
100 (for example)
Maturity value (Basic Sum Assured) is paid to the insured if he is alive at the end of the policy term
Traditional Life Insurance Products
Pg 61-63
Policy Endows Here S$100,000 Cash Values
Cash Value = Death Benefit
Premium 30
40
50
60
70
80
90
1. If he dies before 100, how much will insurer pay? 2. If he lives till 100 and beyond, how much will insurer pay? 3. What if he stops paying premiums before reaching 100? 74
100
Traditional Life Insurance Products Whole Life Insurance Plans • Non-forfeiture options Surrendering the policy for its cash value:
accumulated cash values. This option should be exercised with constraint. Although he can purchase another insurance plan in the future, his health status might have changed.
75
Pg 64
Traditional Life Insurance Products
Pg 64
Whole Life Insurance Plans • Non-forfeiture options Use the cash value to purchase extended term
Policy owner uses his existing cash values to convert his existing policy to an extended term insurance. Appropriate when policy owner does not want to pay for his premiums anymore, but still wants coverage.
76
Traditional Life Insurance Products
Pg 64
Whole Life Insurance Plans • Non-forfeiture options Use the cash value to purchase paid up Whole Life Insurance
Policy owner uses his existing cash values to convert his existing policy to a reduced amount of paid-up Whole life policy. The sum assured is the amount that can be purchased at the Insured’s attained age by the net cash value as if a single premium. No further premiums required. 77
Traditional Life Insurance Products S$300,000 (Sum assured)
Pg 64
Example of NonForfeiture Options
Cash Values
$66,000 Cash Values
25
30
35
40
45
50
100 (years)
Example: Mr. Beckham, aged 50 years, has $300,000 policy, with $66,000 cash value. He has the following options: 1) Surrender whole policy for $66,000 2) Continue the $300,000 coverage for 16.5yrs as Paid Up Term Insurance 3) Reduce the coverage to $184,000 of paid up Whole Life Insurance 78
Traditional Life Insurance Products
79
Pg 67
��������
�������� ����� ���� ���������
������� ������� ������� ����� ���� ���������
Premiums
Lower
Higher
Premium Payment Term
Payable for life
Can be arranged to be fully paid up during one’s working years
Sum Assured (assuming same age, gender and premiums)
Higher
Lower
Cash Value
Builds up slowly
Builds up quickly
Traditional Life Insurance Products ����� ���� ���������
���� ���������
������ ������ �������� ��������; ��������; ��� ������ �������� ������ ������ ������� ���� ��������. �� ���� �� ��� ������� (�� ���� �� ��� ������ ������� �������� ���� ���� ������ ���� �� �����) �������� ���������� ���� ����� ����� ���� ������� ������� � �� ���� ����� ����� ����� ����� ���� ��� ����� ���� ������� �������. �������� ��������� ���� 3�� ������ ���� ������� ������� ���� ��������� �� �������� ���� �������� �� ���� ���������
���� ������� ���� ���� �����, ��������� ����� ���� ��������� �����
�������� ���� �������� ���� ���� �������� ��� �������� �������� �������� ���� ����� ���� ��� ���� ������ �� �������� ��������� ��� ��� ���� ������ �� ��������
80
Traditional Life Insurance Products Suitability of Whole Life Insurance • In summ summar ary y, the the Whol Whole e Lif Life e Pol Polic iciies: es: 1) Provide protection against long term or permanent permanent needs; and 2) Accumulate Accumulate a savings fund that can be used for general purposes or to meet specific objectives
81
Pg 67-72
Traditional Life Insurance Products
Pg 67-68
Nature of Endowment Insurance It’s another type of life insurance, that provides death benefit during the policy term, or the maturity value which is equal to the death benefit if he survives to the end of the policy term.
Unlike whole life insurance plans, they have a fixed maturity date. They are designed to provide a death benefit equal to the
Target accumulation amount during the accumulation period. They can be participating or non participating policies 82
Traditional Life Insurance Products
Pg 69
Features of Endowment Insurance •
Duration of cover is only for the specified period at inception of the policy
• •
Upon death/maturity, benefit usually paid in lump sum ene
usua y pa
n ump sum or n ns a men s
•
Riders are allowable to be attached
•
Cash value builds up quickly.
•
Non forfeiture options like APL* available once policy acquires cash value
•
Policy lapses if premium is not paid within grace period. APL will activate if policy has sufficient cash value
83
Traditional Life Insurance Products
Pg 69
Features of Endowment Insurance •
Policy loans allowed once policy acquires cash value
•
Premium usually higher than Term Insurance and Whole Life Insurance. Lump sum premium is allowed. Payable e
•
84
er
e u erm or or m e num er o years
Can be Participating or Non Participating
Traditional Life Insurance Products Endowment Insurance Plans • Types of Endowment Insurance 1) Pure Endowment Insurance
2) Anticipated Endowment Insurance
85
Pg 67-72
Traditional Life Insurance Products Example of an Endowment Insurance Policy
Pg 67-72
Premium for such policy is higher than term and Death Benefit payable whole life (non-par)
when death/ TPD occurs
Maturity Date
Inception of Policy Policy Term
Can be 10, 15, 20 yrs or up to a certain age limit (e.g. 65) 86
Maturity value (Basic Sum Assured) is paid to the insured if he is alive at the end of the policy term
Traditional Life Insurance Products
Pg 67-72
Example of a PURE Endowment Insurance Policy Maturity Date
Inception of Policy Should occur
Nothing is payable!
Policy Term It is NOT sold as a standalone policy, EXCEPT in some sub-standard cases, where underwriter may counter-offer this policy to the insured in view of his medical history 87
Face Amount is paid to the insured only if he survives to the end of the specified period
Traditional Life Insurance Products Example of an Anticipated Endowment Insurance Policy $2,500
88
$2,500
$2,500
$2,500
Maturity Benefit, $12,500
$2,500
3 6 9 12 15 18 Example of an 18-year, $25,000 Anticipated Endowment Insurance Policy. Insured will receive cash payments every 3 years. Should he die/get TPD during the course of the term, he would still receive $25,000 + bonuses. Cash payments can be left with the Insurer to accumulate interest.
Pg 67-72
Traditional Life Insurance Products
Pg 72
Suitability of Endowment Insurance Plans • Children’s Education • Saving/Investing Purposes 1) Children’s Education 2) Savings/ Investment Purposes (Such as retirement planning, etc)
89
Traditional Life Insurance Products
Pg 72
MAS Disclosure Requirements Relating to Life Insurance Policies • Must furnish the client with:
2) Benefit Illustration 3) Product Highlights Sheet (ILP only) 4) Your Guide to Life Insurance
90
Quiz Time! QUESTION: Name the 2 kinds of Endowment Insurance Policies
ANSWER: Pure Endowment & Anticipated Endowment QUESTION: What are the 3 non-forfeiture options?
ANSWER: Surrendering cash values, use cash values to purchase a Paid Up whole life policy, use cash value to purchase to an Extended Term Insurance policy 91
Quiz Time! QUESTION: Give an example of a Decreasing Term Insurance IMPORTANT NOTE: Read the table on pages 73-74. It’s ANSWER: Mortgage Insurance a testable item! QUESTION: What is renewable option (Term Insurance)?
ANSWER: Giving the life insured the right to renew the policy at the end of the policy term, without the evidence of insurability. 92
Chapter 5 Riders Benefits)
93
Riders (Supplementary Benefits)
Pg 76
Riders = supplementary benefits Basic Contract = can be Non-Par or Par policy
Riders
•
•
•
94
Basic Contract
Basic Contract + Riders
riders are not automatically included in a policy. policy-owner must specifically request for riders to be included but their requests are subject to insurer’s assessment and approval subject to additional premium
Riders (Supplementary Benefits) •
•
95
Pg 76
Riders cannot be dropped by the insurer as long as premiums are paid when due
If the policy lapses, the insurer may refuse to reinstate a rider at the same time that it reinstates the policy
•
Cannot purchase a rider without a basic policy
•
Cannot cancel the basic policy and retain only the rider
•
The term of the rider cannot exceed that of the basic policy
Riders (Supplementary Benefits)
Pg 76
Some of the common riders offered by insurers are: •
Waiver of premium rider
•
Total and permanent disability (TPD) rider
•
Critical illness rider
•
96
erm r ers
•
Payor benefit rider
•
Guaranteed insurability option rider
•
Accidental death benefit rider
•
Accidental death and dismemberment rider
•
Hospital cash (income) benefit rider
Riders (Supplementary Benefits)
Pg 77
Waiver of Premium Rider •
•
Keeps a policy in force in the event that the insured is not able to pay the premiums, when he is totally and permanently disabled or is suffering from one of the critical illness covered under his policy It causes the premiums under a policy to be waived once any of the aforesaid events happened 2 Main Groups
Total and permanent disability (TPD)
Critical illness
Refer to Page 78 for definition of TPD 97
Riders (Supplementary Benefits)
Pg 78
Disability or Critical Illness occurs $
$
$
recovers
Premium Waived
$
$
Premium Paying Term
Waiver of Premium Rider Keeps the policy in force and the policy’s cash value would also continue to increase 98
$
Riders (Supplementary Benefits)
Pg 78
TPD is defined as: Disability such that there is , neither at the time the disability commences, nor at any time thereafter, any , can ever be capable of doing or following to earn or obtain any wages, compensation or profit.
99
Riders (Supplementary Benefits) Rider expires when the insured reaches a specified age Disability or Critical Illness occurs Rider expires here $
$
Normally rider Premium Paying Term expires at age No waiver of 60 or 65 years premium 100
$
$
$
$
Riders (Supplementary Benefits)
Pg 78
TPD is defined as: It also includes the total and irrecoverable: 1) Loss of sight of both eyes or
3) One hand at or above the wrist and one foot at or above the ankle.
101
Riders (Supplementary Benefits)
Pg 78
TPD Waiver of Premium Rider Exclusions: 1) Intentionally self inflicted injuries, while sane or insane 2) Bodily injuries sustained as a result of travel or flight in or on any type of aircraft, except
It also includes the total and irrecoverable: 1) Loss of sight of both eyes or 2) both feet at or above the ankle or 3) One hand at or above the wrist and one foot at or above the ankle.
102
Riders (Supplementary Benefits)
Pg 80
Total and Permanent Disability Rider Example of Payment of TPD Benefit $(60% of SA) $(10% of SA) $
$
In the event of a total and permanent disablement, the disability benefit is paid as a Disability lump sum or in installments spread over a Strikes number of years. Most insurers place a limit (usually $2M) on the aggregate amount of TPD benefit that they will pay on all the policies that an insured has with the insurer. They will also not pay if the disability was caused by intentional self-inflicted injuries. 6 month waiting period
103
$
Riders (Supplementary Benefits)
C������� ������� �����
A����������� B������
Exclusions:
A��������� B������
1) Pre-existing illnesses 2) Self inflicted injury/illness, while sane or otherwise 3) Willful misuse of drugs and/or alcohol 4) Congenital or inherited disorder 104
Pg 81
Riders (Supplementary Benefits)
Pg 84
Exclusions: 5) AIDS or HIV
6) Bodily injury sustained as a result of travel in or on any type of aircraft, except as a fare paying passenger or as a crew member of an international airline operating on a regularly scheduled passenger flight of a licensed commercial aircraft
7) War or warlike operation, civil war or civil commotion
105
Riders (Supplementary Benefits) $200K Whole Life Insurance Policy with 50% Acceleration Rider $200K Whole Death/ TPD
$200K payout
106
Life Policy with 50% cce erat on Rider
Critical Illness
$100K payout Death/TPD $100K payout
Riders (Supplementary Benefits) $100K Whole Life Insurance Policy with 200K Additional Benefit Rider
$100K Whole Life Policy with 200K Acceleration Rider
Critical Illness
$200K payout $100K payout $100K payout 107
Riders (Supplementary Benefits)
Pg 85
Eligibility Criteria for Critical Illness Rider 1) Must be a Critical Illness covered by rider M
l
l
3) Meets the conditions as specified by Insurer 4) Meets Waiting Period and Survival Period
108
Riders (Supplementary Benefits)
Pg 85
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������� ����� ��� ������ �� ��������� �� � ������� �������� ������� ���� ��� ������ ��� ����� ��� �������
��� ����� ��� ������ �� �� ���������� ���� ��� ������� �� � ������� �������� ������� �����, �� �� �� � 100% ������������ �����
���� ��� ����� ��� ������ �� �� ���������� ���� ��� ������� �� � ������� �������� ������� �����
��� ������� ������ ������� ����� ��� ������ �� ����� �� ��� ����� ��� ������� ���� ������� (�� ���)
��� ������� ������ ������� ����� ��� ������ �� ����� �� ��� ����� ��� ������� ���� ������� (�� ���) ���� ��� ����� ��� �������
C������� ������� ��� ������� ���� ��� ������ ���� �� ��� ����� ��� �������
C������� ������� ����� ��� ������� ��� �� �� �� � ������� ������ �� ����� �� ��� ����� ��� �������, ������� �� ��� ��������� ����������
C������� ������� ����� ���� ������� ������� ��� ����� ���� ��� ��� �� ��� ����
C������ ������� ����� ���� ���� ��� ������ ���� �� ��� ����� ���� ��� ������� ������� ���� ��� ���� ������� ������� � ��������� ���
109
Riders (Supplementary Benefits)
110
Pg 84
���� ��� ������
��� � ���� ��� ������ ���� ��������� �� �������� ������� ������� �� ��� ������
��� �������� ������� ����� ����
���� ��� ������� C� ��� �� �������. ����� ��� ���� �������� ����� ��� ����� ���� ���� ���
������� ������
�������� ������� ������. ��� 90 ����
C�� �� ��� �������
���� �������� ��� ������ � ���������� �� ��� ������ �� �������� ����� ������
�����������
�� ����������� �� ��� ��� ������� ��� �� ����. B��� ��� ��� ���/�� �����������
�� ���� �����
D� ��� ������� ���� �����
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A��� ���������� ���� ����� ������ ����������. ��� ������ �� ��� ������� ��� ������ ��� ����� ������ ����������
24���� ��������� ��������
������� ��������� ��������, 24/7 ������ ��������� ������
Riders (Supplementary Benefits)
Pg 88
Term Rider •
Is a term policy attached to a permanent policy
•
Cannot be attached to a term policy
•
Amount of the term rider coverage is usually expressed as a ra o o
e sum assure o
e as c p an
Types of term riders • Level term rider • Decreasing term rider • Family income benefit rider 111
Riders (Supplementary Benefits) Term Rider •
Payor Benefit Rider (3 rd party policies, on payor’s life)
•
Guaranteed Insurability Option Rider
•
Accidental Death Benefit Rider
•
Accidental Death & Dismemberment Rider
•
Hospital Cash (income) Benefit Rider
Read up on pages 94 - 95
112
Pg 88-93
Quiz Time! QUESTION: Name the 2 categories that the riders of Waiver of Premium Rider are in ANSWER: TPD and Critical Illness QUESTION: What are the 3 types of Term Riders? ANSWER: Level Term, Family Income Term,
Decreasing Term.
113
Chapter 6 Participating Life
114
Participating Life Insurance Policies
Pg 98
What are participating policies? Life insurance products that participate in the performance of the participating fund of the life insurer. They share in the profits or the surplus of the participating fund
ommon part c pat ng p ans: 1) Participating Whole Life Insurance policy 2) Participating Endowment Insurance policy 3) Participating Anticipated Endowment Insurance policy Objective of Par Policies and Its Implications They provide competitive and stable medium-to-long 115
term returns to participating policy owners.
Participating Life Insurance Policies
Pg 99
Guaranteed and Non Guaranteed Benefits (Bonuses) Participating policies provide a combination of guaranteed and non guaranteed benefits. Guaranteed benefits are paid out to the beneficiaries should the life ,
.
Non guaranteed benefits depend on the following key factors: 1) Investment performance 2) Level of expenses incurred by or allocated to the participating fund 3) Amounts paid out to meet claims on policies in the participating fund 116
Participating Life Insurance Policies
Pg 99-102
Bonus Distribution Methods Reversionary Bonus
Terminal / Maturity bonus
Cash Bonus
Interim Bonus
117
Participating Life Insurance Policies
Pg100
Types of Non-guaranteed Benefits (Bonuses) -
Revisionary Bonus (RB)
•
It’s the most common type of bonus. Also known as Annual
•
It is an addition to the sum assured, regardless of the age of the ,
118
Bonus.
.
•
In proportion to the sum assured eg: $10 for every $1,000 SA.
•
Declared yearly and credited to each policy on its anniversary date.
•
Sometimes called “vesting”
•
Guaranteed once declared.
Participating Life Insurance Policies
Pg100
Types of Non-guaranteed Benefits (Bonuses) -
Revisionary Bonus (RB) 1) Simple Revisionary Bonus (Refer to Example 6.1, Page 101)
2) Compound Revisionary Bonus (Refer to Example 6.2, Page 101)
119
Participating Life Insurance Policies
Pg102
Types of Non-guaranteed Benefits (Bonuses) -
Terminal Bonus Bon us (TB)
It is added on top of the RB when terminated (due to death, TPD, CI, etc) , minimum period. In Singapore, typical bonus allocation for insurers take place in March/April, following the end of the financial year.
120
Participating Life Insurance Policies
Pg102
Types of Non-guaranteed Benefits (Bonuses) -
Terminal Bonus Bon us (TB)
Policies that terminate in the early part of the year before the finalisation of the bonus allocation may be given interim bonuses.
Typically determined based on the prevailing bonus rates, or bonus rates used in reserves for future bonuses or results from an interim bonus investigation report
121
Participating Life Insurance Policies
Pg102
Types of Non-guaranteed Benefits (Bonuses) Cash Dividends Some plans provide cash dividends rather than additions to the sum assured. Can be converted to additional sum assureds or applied to reduce future contributions.
122
Participating Life Insurance Policies
Pg103
Types of Non-guaranteed Benefits (Bonuses)
Refer to the Examples written on the white board for INTERIM BONUSES:
123
Participating Life Insurance Policies
Pg103
Types of Non-guaranteed Benefits (Bonuses) Level of Revisionary Bonus vs Terminal Bonus The mix between revisionary bonus & terminal bonus can vary for different participating products. Some have higher terminal bonus with lower revisionary bonus, and vice versa.
124
Participating Life Insurance Policies Death Benefit Surrender Value
Paid-Up Amount
=
Guaranteed Death Benefit
=
Guaranteed Surrender Value
=
Guaranteed Paid-Up Value
+
Pg 104
Bonuses Credited
+
Surrender Value Bonuses Credited
+
Paid-up Value of Bonuses Credited
Buying a life insurance policy is a long term commitment. Early termination of the policy usually involves high cost and the surrender value may be less than the total premiums paid. 125
Participating Life Insurance Policies
Pg 104
Determination of Bonuses
Bonuses
Current bonuses (once declared, guaranteed)
Premiums 126
Assets
Future bonuses (nonguaranteed)
Participating Fund
Participating Policies
sse s ac ng Participating Group
Participating Life Insurance Policies
Pg 105
Risk Sharing Mechanism a) b)
Risk sharing rules Methodology to determine amount of asset to back each participating product group
Risk Sharing Rules a) Bonuses (RB & TB) allocated on yearly basis b) Bonuses allocated have to be approved by the Board of Directors of the insurer
127
Participating Life Insurance Policies Risk Sharing Rules Key risks affecting participating fund performance include: • • • • • •
128
Investment risk Expense risk – acquisition and maintainence Mortality risk Dread disease and other morbidity risks Lapse/surrender risk Business risk, eg, non participating policies and riders
Pg 105-106
Participating Life Insurance Policies
Pg 107
Bonus Allocation The Appointed Actuary to take the following into consideration: 1) Maintaining equity and fairness between different generations of participating policies 2) Maintaining solvency of the fund 3) Ensuring consistency with the objective to provide competitive and stable medium to long term returns to participating policy owners
Vesting and Allocation of Bonuses are NOT the same! Bonuses allocated may not vest immediately. Usually, allocated bonuses are vested only upon the policy anniversary for which the bonuses are due and after premiums are paid 129
Participating Life Insurance Policies -
Pg 107-109
Determination of Annual Bonuses to be allocated: Allocated annually to all in-force participating policies, except in some cases, such as policies in force for less than 2 years. Normally bonus rates will only be adjusted IF:
• •
there is a rolon ed eriod of ood or oor erformance; and/or there is a change in medium to long-term expected investment returns
-
Terminal Bonus A percentage of compounded bonus. Normally given only to long term plans. Not applicable to policies that terminate during the initial years.
130