Life insurance and annuities Chapter 12

Two kinds of protection Mortality Longevity (life annuities) Combination

Simplest life policy For one period Premium = PV of expected claim + expenses Premiums increase with age –mortality –adverse selection

Level premium concept Two periods Probabilities 0.01 and 0.02 Ignore expenses Expected claims = 10,000 and 20,000 Interest rate = 10% Premiums = and

Level premium concept Premium 1$13, First year mortality charge$9, Balance invested$4, Amount at the end of year 1$4, Premium 2$13, Second year mortality charge$18, Amount at risk at the end of year 1$995, Premium for this amount$9,047.41

Term Policies 1 year, 5 year, 10 year... Renewable term Convertible term

Cash value policies Cash value and reserve Types of policies –Single premium whole life –Straight whole life –Limited pay whole life –Endowment –Universal –Variable

Participating policies Policy holders’ dividends Dividends as policy refunds

Classification Ordinary life Group life Credit life Industrial life

Annuities Pure life annuities Fixed and variable annuities –Self directed annuities –Equity indexed annuities

Taxation Life insurance is a tax favored instrument –Death benefits not taxable –Investment income not taxable unless with drawn Return of capital not taxed