RISK MANAGEMENT

ASSIGNMENT 3

By :

Group 1

Alexander Gregorius Ersan

Alexander Steven Themas

Alya Ramadhani Oesman

Diandra Safira Larasati

Marcella Leticia Salim

President University

Cikarang Utara
 2019
ASSIGNMENT

1. What is the difference between term life insurance and whole life insurance? Explain
the tax advantages of whole life insurance.

Answer :

Deciding whether to purchase whole life or term life insurance is a personal

decision that should be based on the financial needs of your beneficiaries as well as
your financial goals. Life insurance can be a very flexible and powerful financial
vehicle that can meet multiple financial objectives, from providing financial security
to building financial assets and leaving a legacy.

Features of term life insurance

 Provides death benefits only

 Pays benefits only if you die while the term of the policy is in effect
 Easiest and most affordable life insurance to buy
 Purchased for a specific time period, such as 5, 10, 15, or 30 years, known as a “term”
 Becomes more expensive as you age, especially after age 50
 The term must be renewed if you want coverage to be extended beyond the term
length
 Can be used as temporary additional coverage with a permanent life insurance policy
 Can be converted to whole life insurance

Features of whole life insurance:

 Covers you for life

 Provides death benefits as well as a cash value accumulation that builds during the life
of the policy
 You typically must qualify with a health examination
 Can be purchased without a medical exam, but at a higher cost
 Takes 12 to 15 years to build up a decent cash value
 Can be a good choice for estate planning

The tax advantages of whole life insurance

 1. The death benefit is generally paid out income tax free.

That’s a pretty straightforward advantage for your beneficiaries. Life insurance

policy payouts can be pretty hefty and avoiding a major tax bite can be consequential. By
contrast, the government will typically tax most retirement plan proceeds when taken by
beneficiaries.

2. The total cash value accumulates on a tax-deferred basis.

Whole life insurance builds up cash value over time as you pay premiums. This is
money that grows without the IRS taking a bite. And it can become an important nest egg
for your future.

3. You can access the cash value of the policy on a tax-advantaged basis.

Money borrowed or taken from the cash value of a life insurance policy is not
subject to taxes up to the “cost basis” – the amount paid into the policy through
premiums.

To understand how this works, take a hypothetical case of “Steve,” who bought a
whole life policy in 1980.

2. Explain the meaning of variable life insurance and universal life insurance.

Answer :

Variable life insurance is a permanent life insurance policy with an investment

component. The policy has a cash value account, which is invested in a number of
sub-accounts available in the policy.

Universal life insurance (often shortened to UL) is a type of cash value life
insurance, sold primarily in the United States. Under the terms of the policy, the
excess of premium payments above the current cost of insurance is credited to the
cash value of the policy, which is credited each month with interest. The policy is
debited each month by a cost of insurance (COI) charge as well as any other policy
charges and fees drawn from the cash value, even if no premium payment is made that
month.

3. A life insurance company offers whole life and annuity contracts. In which contracts
does it have exposure to (a) longevity risk, (b) mortality risk?

Answer :

A. annuity contracts
B. whole life

4. Use Mortality Table to calculate the minimum premium an insurance company should
charge for a $1 million two-year term life insurance policy issued to a woman aged 50.
Assume that the premium is paid at the beginning of each year and that the interest rate is
zero.

Answer :

The probability the woman will die on first year = 0.003289

The probability the woman will die on second year
= 0.003559 x (1 – 0.003289)
= 0.003559 x 0.996711
= 0.00354729
Breakeven premium = x

1,000,000 x (0.003289 + 0.00354729) = x + (1 – 0.003289)x

1,000,000 x 0.00683629 =
6836.29 =

= x

= x

So, the break-even premium is $3,423.78

5. From Mortality Table, what is the probability that a man aged 30 will live to 90? What
is the same probability for a woman aged 30?

Answer :

Maleage 30 to 90 has probability 3.92 and Women age 30 to 90has probability

4.69. They have different probability because back to physical issue of them.

6. How does health insurance in the United States differ from that in Canada and the
United Kingdom?

Answer :

In the US, health insurance are usually provided through private companies.
Americans take care of their own healthcare without assistance from the government,
except for those who have disabilities, are unemployed, or live at or close to poverty
level. This differs from the single-payer, government-funded system used in the UK,
 known as British National Health Service (NHS). NHS employees (including care
providers) are all employees of the UK government. As long as you’ve registered with
a General Practitioner (GP) and are in the UK legally, you’re entitled to free
healthcare that covers everything you could possibly need. Recent reforms to the NHS
have caused some controversy, however, it is still known as one of the best healthcare
systems in the world while still being a popular target for criticism due to waiting
times, low wages for nurses, and the shortage of available beds in hospitals. Health
coverage is publicly-funded in Canada, means that the funds come from federal and
provincial taxes.Additionally, care is provided by plans created in each province or
territory, rather than a single, unified federal health plan. The Canadian government
pays into these plans, but each territory and province is responsible for taking this
money to create their own system under the guidelines, for example, all necessary
health services like surgical dentistry, hospitals, and doctors must be insured by the
public plan.

7. An insurance company decides to offer individuals insurance against losing their jobs.
What problems is it likely to encounter?

Answer :

Insurance itself is an agreement between insurance services as a guarantor and

the community holding a policy that is required to pay a premium amount in order to
provide compensation for the risk of loss, damage, death, and loss of expected
benefits, which may occur over unexpected events.

The purpose of insurance is:

 Provides guaranteed protection from the risks of losses suffered by one party.
 Improve efficiency, because there is no need to specifically carry out security
and supervision to provide protection that takes a lot of energy, time and
money.

 As savings, because the amount paid to the insurance party will be returned in
greater amounts. This is especially true for life insurance.

An example of this insurance is: Layoff Credit Insurance

Insurance that provides protection and guarantees the insured in the event of
termination of employment (FLE) so that it cannot continue its obligations to the
Bank or the lender (creditors), then against these risks the Insurance company as the
guarantor is obliged to repay the loan or the insured's obligations.
8. Why do property-casualty insurance companies hold more capital than life insurance
companies?

Answer :

Life insurance itself is a type of insurance that usually provides financial

benefits to the insured for unexpected events, such as death. Even so, there are
insurance companies that allow the insured insurance policy holders to claim funds
before dying. That way, you can have savings, because premiums are paid regularly.

Property insurance can provide protection against loss or damage that may
occur to the assets of the insured, as well as various natural disasters such as, struck
by lightning, floods, earthquakes, and also fires.

Property insurance can also be combined with packages that guarantee

protection of all property in the house. So, not only buildings are protected, but also
valuables in them, such as jewelry and collectibles.

So property insurance does require more capital because they protect in the
field of valuable items

9. Explain what is meant by “loss ratio” and “expense ratio” for a property- casualty
insurance company. “If an insurance company is profitable, it must be the case that the loss
ratio plus the expense ratio is less than 100%.” Discuss this statement.

Answer :

For insurance, the loss ratio is the ratio of total losses incurred (paid and
reserved) in claims plus adjustment expenses divided by the total premiums earned.
And the expense ratio in the insurance industry is a measure of profitability calculated
by dividing the expenses associated with acquiring, underwriting, and servicing
premiums by the net premiums earned by the insurance company. The expenses can
include advertising, employee wages, and commissions for the sales force. This
statement name is Combined Ratio. Combined ratio measures the money flowing out
of an insurance company in the form of dividends, expenses, and losses. Losses
indicate the insurer's discipline in underwriting policies. Combined ratio is usually
expressed as a percentage. A ratio below 100 percent indicates that the company is
making underwriting profit, while a ratio above 100 percent means that it is paying
out more money in claims that it is receiving from premiums. Even if the combined
ratio is above 100 percent, a company can potentially still be profitable because the
ratio does not include investment income.

10. What is the difference between a defined benefit and a defined contribution pension plan.

Answer :
 Defined contribution plans are funded primarily by the employee, called the
participant, with the employer matching contributions to a certain amount.
A defined-benefit plan is an employer-sponsored retirement plan where
employee benefits are computed using a formula that considers several factors, such
as length of employment and salary history.