1: Life assurance & policy types

Tirana, Albania – April 2012

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AGENDA

Life assurance & early development

How policies are written
Basic types of life policies
Term, Endowment & Whole Life
Bolt-on options
Group Life
Annuities
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Early life assurance

Historical background:
Burial societies
Britain's Trade Guilds
1583 – William Gybbons (UK)

The contributions of the many,

make up for the losses of the unfortunate few.
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UK Life assurance companies - 20th century

Establishment of life offices

Mutual societies – owned by policyholders
Proprietary companies – owned by
shareholders
Demutualisation – the conversion of mutual
societies into proprietary ones
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More recent developments

Bancassurance
Other providers:- Virgin, Marks & Spencer,
Tesco & Boots in the UK
A vast range of life assurance products &
additional benefits
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Mortality tables

Early mortality tables & actuarial science:

James Dodson & Edmond Halley
Charging level premiums based on age at
outset
1801 –UK Govt Census – accurate mortality
tables

Are men & women charged the same

premium?
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The first underwriters ….

Underwriting – the process of risk analysis

Initially - Board of Directors as underwriters
Underwriters at life offices, assisted by medical
referees, reliance on proposal forms and non-
medical limits
Introduction of 'Underwriting Scanning' software
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Taking out a life assurance policy

Proposer decides Insurance Co.

on: will promise to:
Premium Pay the agreed
Sum Assured on
Policy type
death/maturity
Term of years
Pay additional
Life Cover req’d benefits if any
Other benefits
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Reasons for taking out a life policy

Peace of mind - protection

To secure a banking facility
Replace earned income
Repay debts
Meet additional living expenses
Ensure existing plans can be completed
Enable inheritance tax liabilities to be met
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How policies are written

Assured & Life assured

Own life (single life)
Joint lives – 1st & 2nd death
- (joint life last survivor)
Life of another policies
- eg. Key person
Group life policies
Basic types of life policies

Term Endowment Whole of Life

Level Non-profit

Renewable With-profits
With-profits Unit-linked
Convertible Unit-linked

Decreasing Single Prem.

Increasing Hybrid types

Index linked
Family Income
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TERM or Protection Policies

Definition:-
The Sum Assured is payable only if the death of
the life assured occurs within a specific period of
time ie. the expiry date.

The main features:-

 Pure protection
 No investment element
 No cash surrender value
 Policy will lapse if premium is not paid within the
days of grace
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Level Term policy

60000
Sum Assured
50000

40000
Sum Assured

30000

20000

10000

0
6 10 15 20 25 30
Term of years
Expiry date
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Level Term
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Renewable Term policy

60000
Sum Assured
50000
Eg. Policy renewed every 5 years,
40000 without medical evidence.
Sum Assured

Premium based on ANB.

30000

20000

10000

0
5 10 15 20 25 30
Term of years
ANB = Age next birthday
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Increasing Term policy

60000
Sum Assured
50000
SA increased each yr by a
set % eg. 10% of original
40000
Sum Assured

SA.
Or Increasing Renewable
30000 Term with a SA that
increases by 50% each
20000 time.
Or Guaranteed Insurable
10000 Options (GIOs)

0
6 10 15 20 25 30
Term of years
Expiry date
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Decreasing or Reducing Term

60000

50000
Sum Assured
40000
Sum Assured

30000

20000

10000

0
6 10 15 20 25 30
Term of years
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Reducing Sum Assured
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Family Income Benefits

60000

50000
The SA is paid out by installments
40000 for the next 10 years, replacing
Sum Assured

breadwinner’s lost income.

30000
Death
20000 claim

10000

0
6 10 15 20 25 30
Term of years
 Option to convert all or part of the SA into
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Convertible Term an Endowment or Whole of Life policy
(savings plan) without evidence of health

60000
Sum Assured
50000

40000
Sum Assured

Endowment or
30000
Whole of Life
20000

10000

0
6 10 15 20 25 30
Term of years
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Endowments:-
With-profits
Unit-linked
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Endowment Policies

Definition:-
A savings plan with built-in life cover. The Sum
Assured is payable on death or maturity,
depending on the insurance provider and product
features.

The main features:-

A mix of life cover & investment;
Level premiums;
Accrue a Cash Surrender Value (CSV);
Additional benefits may be selected;
May be ‘traded’ – sold in the 2nd hand market;
Best yield taken when policy is allowed to mature.
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WITH PROFIT Endowments
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Endowment WITH-PROFITS
The policyholder participates indirectly in the Life Office’s
investment performance derived from the Life Fund, by way
of Reversionary & Terminal Bonuses.

Reversionary / Regular Bonus

Usually not known in advance
Expressed as a % of the SA or the Investment Premium
Usually declared annually, compound or simple interest.

Terminal / Final Bonus

Paid on death or maturity BUT NOT on surrender.
Usually expressed as a % of the total reversionary
bonus declared from policy inception.
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WITH-PROFITS Endowments (UK)

30000

25000 The policy value increases

each year by way of
20000 Reversionary Bonuses.
Sum Assured

Expressed as a % of Sum
15000 Assured. Compound or
simple interest.
10000

5000

SA 0
6 10 15 20 25 30
Term of years
Maturity date
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WITH PROFIT Endowments - UK
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WITH-PROFITS Endowments (Malta)

30000
Sum Assured (optional)
25000

20000
Sum Assured

The Policy Account

increases each year by way
15000
of Reversionary Bonuses.
Expressed as a % of the
10000
investment premium.
Compound or simple interest.
5000

0
6 10 15 20 25 30
Term of years
Maturity date
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WITH PROFIT Endowments - Malta
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WITH-PROFITS Endowments
The BENEFITS:-
The Sum Assured is guaranteed from the outset
The value of the policy increases year on year
Constant capital growth
Regular bonuses become locked-in once declared
Premium may be increased to combat inflation
Lump sum on maturity

The DRAWBACKS:-
Investment decisions rest with the company
Provide conservative growth
Penalties for early surrender – terminal bonus is lost
MVR – Market value reduction may be applied for early
surrenders
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UNIT-LINKED Endowments

The policyholder links the policy to a

number of unitised funds. For
example the premium may be
allocated as follows:-
20% in an American Equity Fund
20% in a European Equity Fund
20% in a Far East Equity Fund
40% in an International Bond Fund

Diversification: currency, asset class, geographical allocation

Pound cost averaging: invest monthly rather than annually
Client’s age, risk profile & financial objectives.
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What is a FUND?
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UNIT-LINKED Endowments
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UNIT-LINKED Endowments
The main features:-
Dual price structure – BID & OFFER
Bid-offer spread / gap eg. 5%
Free premium re-direction
Free switches per calendar year
Initial allocation charge
Management charge
Policy fee – level or inflating
Exit fee structure
May allow for full/ partial withdrawals
Choice of different funds
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Unit-Linked Endowment Policy

30000
Sum Assured (optional)
25000

20000
Sum Assured

15000 The policy value

fluctuates according to
10000 the performance of the
funds linked to the policy.
5000

0
6 10 15 20 25 30
Term of years Maturity date
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UNIT LINKED Endowment - Malta
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Whole of Life Policies

Non-profit
With-profits
Low cost
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Whole Life policies

Definition:- a policy that pays out the Sum

Assured whenever the life assured dies. It is a
permanent policy, not limited to an expiry date,
as in Term assurance. Therefore a payout is guaranteed.

The main features:-

Level life cover (non-profit) – very rarely sold;
A mix of life cover & investment (with-profit or unit-linked);
Payment of premium may cease eg. On reaching retirement age;
Regular or single premium.
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HYBRID Whole of Life - Malta
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Bolt-on options or additional benefits

Accidental death
Waiver of premium
Injury Benefit
Permanent Total Disability
Critical illness, also known as
Dread Disease cover
Terminal Illness Cover
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Group Life Assurance

Calculation of life cover – multiple of salary; by

grade or carpet cover
Duration of cover – 1 or 2 yrs; 24 hrs worldwide;
employees on company's books
Widows' & orphans' pension
Discretionary trust – expression of wish form
Tax on benefit – no IHT (Inheritance Tax) liability
Premium & Underwriting
Group cover for employees abroad
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Business Assurance

Partnership Group Assurance

Partnership share protection
Directors' share protection
Key Person Insurance (IPI)
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Annuities

A contract to pay a set amount every year,

while annuitant is still alive.
Can be payable monthly, quarterly, half-yearly
or annually.
Can be paid in advance or arrears.
May be immediate or deferred.
Most annuities are paid for by a single
premium, called the ‘consideration’.
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Annuities:-
Immediate, deferred, temporary

Certain

Guaranteed

Joint Life & Last survivor

Impaired life annuities

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Immediate – a single premium is paid in return for annual payments that continue for the rest of the
annuitant's life. They are often purchased by retired people to provide them with a regular income for life. The
length of time that these payments will be made obviously cannot be known by the life office as the annuitant may
die after receiving very few installments or may survive to a very old age.

Deferred – with this type of annuity contract the date on which the installments will become payable is
deferred until some future date. The period between the date of the contract and the date on which the annuity is to
commence is often called the deferred period. In the event of the annuitant dying in this interim period the office will
usually return the premiums paid, with or without interest. The main points are: installments start at some future
date. The annuity can be purchased either by payment of a single premium or by regular premiums throughout the
deferred period. A cash option is often available instead of the annuity.

Certain – An annuity certain is a simple contract to pay an annuity for a specified period regardless of
whether the annuitant survives. It does not depend on the age or life of the annuitant, as payment is guaranteed. If
the annuitant dies during the period of payment, the installments would continue to be paid to the deceased's estate
or named beneficiary.

Guaranteed - A guaranteed annuity is an immediate annuity which is guaranteed for a minimum period
regardless of when the annuitant dies. For example, an annuity guaranteed for ten years will be payable for ten years or for life
whichever is the longer. If the annuitant dies during the guaranteed period the balance of the guaranteed installments will be
payable to his estate, although a commuted cash sum may be available instead.

Joint & Last survivor - Where retirement provision is required, joint life and last survivor annuities
have been developed to ensure that the annuity payments continue to the surviving partner after the death of their spouse.
Payments usually continue in full after the first death but sometimes may be reduced by, for example, one third. These
annuities can be in advance or arrears, with or without proportion and with or Without guarantee, as for single life annuities.
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