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General Factors of Success

Infrastructural development: Better roads, better ports, better telephony, assured supply of power andwater ...all these have huge externalities and could lead the country to that longed for double-digit growth. Butthese take years to construct and pay-back time comes much later. The result is that infrastructure projects with

their long gestation periods find few takers. A banker who is willing to finance an automobile manufacturer willbalk at lending to a private company that is building a road where the pay-back period is typically far longer could be as much as !"-#$ years. This is not surprising since his deposits are mostly short-term and he willhave to return the money to depositors well before the borrower repays.

%nsurance companies, especially life insurance companies, have no such problem. They mobilise savings thatare essentially long-term, say #$-#" years and need to invest in avenues that are e&ually long-term.%nfrastructure projects could be a perfect fit. But today, we have a peculiar situation. 'n one hand there is acrying need for better infrastructure while that of other is that , even though funds are available, the limitedspread of the insurance sector means that companies that could channel these savings to infrastructure are notable to mop them up.

%ronically, the restrictions on ()% come at a time when emerging markets have never seemed so enticing to

private capital flows. According to the %nstitute of %nternational (inance, private flows into emerging markets areset to touch a new record this year. All we need to cash in on this bonan*a is to raise the cap on ()%. Theresultant spread of insurance could see a huge increase in the demand for long-term savings instruments thatcould be used to fund infrastructure projects.

Flexible approach: +rivate insurers with an altogether new agency force, all ready to hawk freshly designedinsurance policies. And the market scene - a government owned established insurance entity -the ife%nsurance orporation %/ with a field force of over 0,$$,$$$ agents and more than 1$ products to choosefrom.

%ts almost a year since private insurers began their operations. %n a scenario where % called the shots allthese years, how far have private insurers been able to make inroads after almost a year since the opening of the sector. And are their sales force called life advisors or insurance consultants/ successful in pushing their products inspite of the security factor -the 2government guarantee3 label attached to % products - %nsure magicmakes an attempt to find out.

%n comparison to popularly known as %, the initial breaking-through by private insurers was not an easy task.Being in the insurance business for about "$ years, % had already carved a name for itself in the %ndianpsyche. %nsurance being a long term contract, an established name means a feeling of security and moreimportantly % policies come with the safety tag - the most touted government guarantee. 4o how easy is it tobreak the mold5 ompetition, no doubt is getting rife. +rivate insurers are concentrating on need based selling.+rivate insurers are playing it safe - not assuring any guaranteed returns. +rice wise the difference in productsis marginal. Buying riders may mean paying a little extra but check out the benefits offered and its more thanworth the price.

)iscussion of providing customer service - an hitherto neglected area, and private insurers reali*ed it is an areathey could score over the behemoth easily. % with the entry of private insurers flagged off a mass

computeri*ation drive that would connect each of its branches across the country to facilitate among otherspremium payments online. onsidering the reputation % has built over a period of time attached with the mostsaleable tag of government guarantee, and the deep- rooted loyalty reposed in it is comprehensible whichmanifests in its policy sales.

+rivate insurers have been able to make a dent in the market in the first year of their operations garnering amarket share of a mere $.$# per cent of the 6s 70,$8$.9 crore market as per % resources. And four privatelife insurers together have sold !$,$$$ insurance policies during the first year. omparatively % issued twocrore risk covers during the said period inspite of the entry of private insurers: including 7.9" lakh new annuitypolicies3 says the % agent proudly.



(or private insurers the first year has been well begun. The insurance sector claimed more newsprint than anyother and with tailor made policies, riders;add-ons, publicity campaigns etc the interest has caught upconsiderably. The awareness building exercise undertaken by private insurers has paid off.

Outreach approach to all section of the countries

Diverse product range: 'ne would observe that the buyer of the insurance products also looks at them as theinvestment products. This is an issue of conditioning over the period of time and therefore, the customers of theinsurance products are both the customers of the risk protection and the investment products. That leads to theinsurance sector competing with the other avenues of the investment including banks,

financial institutions and investment companies. The structure of the players in different opportunity *ones isalso changing on continuous basis. orporate marriages, exchange3s mergers, clearing corporations alliances,regulator3s integration, globally, bear testimony to it. onvergence of the financial products is also apparent,everywhere. As an example, let us look at the securities brokers. They are no more securities brokers: they arethe brokers exploring opportunities across different dimensions of the economy. 4imilarly, enterprises in thefinance are talking about one stop shop offering all the products ranging from commodities to securities tocurrencies under one roof. This change in business models is necessitated by the values buried in the inter linkages of the opportunity *ones, emerging from economies of scale and economies of scope. 'n exchangesside, more and more products are migrating to the exchanges for trading. <lobally, availability of all sorts of

financial products both money market and capital market/ on the exchanges is driven by the benefits liketransparency, better price discovery, wider dissemination of information and large investing community.=ergers of the exchanges is adding to all these dimensions, globally.

Boost to capital formation of the country: The entry of new players would also expand the products offeredat present by the % and <%. Apart from core life insurance, fire insurance and other related product offersthe new players would also offer insurance products hitherto new to the %ndian consumers. (or e.g. =ax >ew?ork ife is planning to offer credit risk insurance. @nder this policy a person can get his housing loan or car loan insured. Thus incase the person cannot repay the loan amount because of disability or death, the assetwill not be impounded, because the insurance company will repay the outstanding amount. 4ome of the newplayers are also targeting new segments in the market to sell their products.

(or example %((' Tokyo =arine is planning to target the 7",$$$ odd farmers3 co-operatives to sell its

policies. This will create a whole new range of insurance policies for farmers. %t will also introduce farmerscredit and weather insurance so that the farmer need not be unduly worried in case of floods.

But primarily in most of the insurance products, especially in life insurance, the policies will range between 6s."$,$$$ one lakh as volumes lie in this segment. This is added to the fact that the %ndian consumer is pricesensitive.

The entry of new players could mean a lot of competition to both % <%. They would be forced to be morecustomer friendly. 4econdly the %ndian consumer will have a plethora of policies products to choose from. %twill also have a positive impact on the economy where huge funds generated by the insurance companies canbe channelised for productive investments namely in infrastructure projects, social sector and other relatedfields. Thus the %nsurance arena is the place to watch out for in the future.

Insurance & Bond ar!et: %nsurance companies also play a crucial role in widening and deepening the bondmarket. Cider and deeper markets invariably result in better price discovery, help reduce margins, lower thecost of capital and, in turn, lead to more capital issues coming to the market. An efficient bond market alsogenerates a critical mass of capital that, apart from making markets more sophisticated, reduces thedependence of domestic companies on the whims of foreign investors. This could become a critical factor whenother channels of financial intermediation banks and e&uity markets falter or fail.

%n fact, one of the major causes of the Asian crisis was the lack of mature bond markets that could absorb theshock when international banks panicked and withdrew. 'nce bank credit shrank and stock markets collapsed,



overseas investors could not diversify into domestic bond markets even if they wanted to. The only alternativewas to withdraw their capital, which they did, with devastating conse&uences.

• A rapidly growing insurance sector does wonders for infrastructure

• Long-term savings also help widen and deepen the bond market

"e# products in insurance sector

$ension $lan

Before you enter into any financial contract, it is important that you understand what the product is, how itworks, the risks involved and what a decision to buy could mean for you. %t is recommended that you read thedocument before you purchase a policy from D)( 4tandard ife %nsurance ompany.

Infra structural Bonds

4ome bonds have a special provision that allows the investor to save on tax. These are termed as Tax-4aving

Bonds, and are widely used by individual investors as a tax-saving tool.

Examples of such bonds are

a/ %nfrastructure Bonds under 4ection 11 of the %ncome Tax Act, !F0!

b/ apital <ains Bonds under 4ection "9E of the %ncome Tax Act, !F0!

%BI ax %elief Bonds

%nfrastructure bonds are available through issues of %%% and %)B%, brought out in the name of %%% 4afetyBonds and %)B% (lexibonds. These provide tax-saving benefits under 4ection 11 of the %ncome Tax Act, !F0!,for the investor. ?ou can reduce your tax liability by upto 6s !0,$$$ per annum

(or instance, the tax-saving bond from %%% for the month of Guly #$$! provides two options

a/ (ace value of 6s ",$$$ for 7 years H F.$$I interest payable annually.

b/ )eep )iscount Bonds arrying a face value of 6s 0,0$$, these bonds are available for 6s ",$$$, and areissued for 7 years and 9 months, after which they are redeemed at their face value, i.e., 6s 0,0$$, thedifference being the interest youJre entitled to.

The terms for the %)B% Bonds are similar. According to the Guly #$$! bond issue from %%%, the yield toinvestors including tax benefits/ works out to approximately !1." per cent per annum in the first option andapproximately !0.8 per cent per annum in the second. )eep )iscount Bonds are suitable for an increase inyour investment. These bonds, which are sold at a discount on their face value, are redeemed at their facevalue on maturity of the instrument, the difference being your gain and interest on %nfrastructure bonds ispayable H F.$ per cent annually

Infrastructure bonds

This scheme is basically for%ndividuals or on behalf of minors and trusts. The minimum limit for investment inthis scheme is 6s. "$$$;- while the maximum limit is unlimited. The interest on this scheme is 1I compoundedsemi-annually. The maturity period is of six years. Dowever after four years pre-mature withdrawal can be done.This scheme helps to avail tax benefits under the 4ec 11 and 1$.



GI'

The <roup %nsurance ommission <%/ was established by the egislature in !F"" to provide and administerhealth insurance and other benefits for the ommonwealthJs employees and retirees, and their dependents andsurvivors. The <% also covers housing and redevelopment authoritiesJ personnel, and retired municipalemployees and teachers in certain governmental units. The <roup %nsurance ommission is a &uasi-independent state agency governed by an eleven-member commission appointed by the <overnor. The <%Jsmission is to provide access to &uality care at a reasonable cost.

()I$

A @nit linked %nsurance +olicy @%+/ is one in which the customer is provided with a ife insurance cover andthe premium paid is invested in either debt or e&uity products or a combination of the two. Every insurancecompany has four to five @%+s with varying investment options, charges and conditions for withdrawals andsurrender. The premiums paid for @%+4 are eligible for tax rebates under section 11 which allows a tax rebateof #$I of premiums paid for taxable income below 6s.!." lakh and !"I for income between 6s. !." lakh and6s." lakh.+roceeds from @%+s are tax-free under section !$!$)/ unlike those from a mutual fund whichattract capital gains tax.

%ole of technology in Insurance Sector

=ost of the opportunities and challenges that we have discussed apply e&ually to existing and new insurers. %tmust be emphasi*ed that the opening of the insurance market is far from a bad thing for nationali*ed insurers.Cith a strong presence, a wide network and considerable brand e&uity, they are in a good position to tap thevery same segments profitably, while improving their product and service offerings. All insurers in a liberali*ed%ndian market will have to address a host of other issues. They will have to

• everage information technology to service large numbers of customers efficiently and bring down

overheads. Technology can complement or supplement distribution channels cost-effectively. %t can

also help improve customer service levels considerably.

• @se data warehousing, management and mining to gauge the profitability and potential of various

customer and product segments and ensure effective cross selling. @nderstanding the customer better will allow insurance companies to design appropriate products, determine pricing correctly and

increase profitability.

• Ensure high levels of training and development not just for staff but for agents and distribution

organisations. Existing organisations will have to train staff for better service and flexibility, while all

companies will have to train employees to cope with new products and an intensive use of information

technology.

• The importance of alliances and tie-ups means that companies will have to integrate related but

separate providers into their systems to ensure seamless delivery.

• Build strong relationships with intermediaries such as agents

%nnovation value drivers in %nsurance industry

The new entrants would be best served by micro-level two pronged strategies.

(irst, is to introduce innovative products offering a right mix of flexibility;risk;return depending which will suit the

appetite of the customers and the secondly they would target specific niches, which are poorly served or are

not served at all.



The first prong of a new insurer3s strategy could be to stimulate demand in areas that are currently not served

at all. (or example, %ndian general insurance focuses on the manufacturing segment. Dowever, the services

sector is taking a large and growing share of %ndia3s <)+ This offers immense opportunities for expansion

opportunities. (or example, revenue from remote processing activities in information technology is estimated at

@4) "$ billion in the next ten years. %nsurers could respond with various liability covers.

Being the agrarian economy again there are immense opportunities for the new entrants to provide the liabilityand risks associated in this sector like weather insurance, rainfall insurance, cyclone insurance, crop insurance

etc.

>ext, the financial sector is aggressively targeting retail investors. Dousing finance, auto finance, credit cards

and consumer loans all offer an opportunity for insurance companies to introduce new products like creditor

insurance etc. 4imilarly, organi*ed sector sales of TKs, refrigerators, washing machines and audio systems in

!FF1 was around 6s.!!$ billion. 'nly a negligible portion of these purchases was insured. +otential buyers for

most of this insurance lie in the middle class. Existing players can also profitably exploit these areas.

%n case there are products, which are not serving ade&uately new products many of them, which are already

prevalent in different markets can be customi*ed to the %ndian markets and used to expand the markets. (or

example life insurance products provide a good example. ife %nsurance products have to compete withsavings and mutual funds hence should offer various dimensions of risk;return;flexibility so they can be linked

to stock market indices, inflation etc. making them more competitive and appropriate risk;return appetite for

different investors at present there are no such products. 4imilar problems apply to pensions. (or instance,

pure protection products like term assurance account for up to #$I of policies sold in developed countries. %n

%ndia, the figure is less than one percent because policies are inflexible. They compete with investment and

savings options like mutual funds. %t is imperative that they should offer comparable returns and flexibility and

there is immense scope of developing pure insurance products with flexibility.

The lack of a comprehensive social security system combined with a willingness to save means that %ndian

demand for pension products will be large. Dowever, current penetration is poor. =aking pension products into

attractive saving instruments would re&uire only simple innovations already prevalent in other markets. (or

example, their returns might be tied to index-linked funds or a specific basket of e&uities. Buyers could beallowed to switch funds before the annuities begin and to invest different amounts at different times.

Dealth insurance is another segment with great potential because existing %ndian products are insufficient. By

the end of the <%3s =ediclaim scheme covered only #." million people. %ndian products do not cover disability

arising out of illness or disability for over !$$ weeks due to accident. >either do they cover a potential loss of

earnings through disability.



Market Conditions

The life insurance industry is one of the largest industries in the world. Premiums for life, health, and

annuity grew by 5.7 percent from $583.6 billion in !!6 to $6"6.7 billion in !!7 in the #nited

tates.%nsurance %nformation %nstitute &%%%', The Insurance Fact Book, !!(, "(. This section

concentrates on the life products sold to indi)iduals. * comprehensi)e summary of these products is

a)ailable in Table "(." +haracteristics of -aor Types of /ife %nsurance Policies+. The trend is

toward lower life insurance rates for all types of life insurance products. %mpro)ements in mortality

rates ha)e accounted for lower e0pected rates. This impro)ement was also highlighted in hapter "7

+/ife ycle 1inancial 2iss+. The life4health industrys condition deteriorated during the economic

recession beginning in ecember !!7. These problems are detailed in the bo0 The /ife4ealth

%ndustry in the 9conomic 2ecession of !!8:!!(.;

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Term Insurance

Term life insurance pro)ides protection for a specified period, called the policys term

&or duration'. <hen a company issues a one=year term life policy, it promises to pay the

face amount of the policy in the e)ent of death during that year.

Duration

The length of term policies )aries> common terms are one, fi)e, ten, fifteen, and twenty

years. Term policies are often not renewable beyond age si0ty=fi)e or se)enty because of

ad)erse selection that increases with age. %ncreasingly, howe)er, yearly renewable term

policies are renewable to age ninety=fi)e or one hundred, although it would be unusual

for a policy to stay in effect at ad)anced ages because of the amount of the premium.

?early renewable term policies are subect to high lapse rates &that is, failure to be

renewed' and low profitability for the insurer.

hort=term life insurance policies in)ol)e no in)estment element. /ong=term contracts

&e.g., term to age si0ty=fi)e', when accompanied by a le)el premium, can accumulate a

small cash )alue element in the early years, but this is depleted during the latter part of

the term because then the cost of mortality e0ceeds the sum of the le)el premium and

the in)estment earnings. Two options are typically a)ailable with term insurance sold

directly to indi)iduals@ renewability and con)ertibility.

Table "(." haracteristics of -aor Types of /ife %nsurance Policies

Distinguishing Feature Premiums Cash Value Death Benefit

Term life Provides protection for a Fixed, but increase None, thus no Pays face



Distinguishing Feature Premiums Cash Value Death Benefit

specific period (term)

at each renewal provision for

loans or

withdrawals

amount of policy

if death occurs

within term

Whole lifeLifetime protection: as long as premiums are paid, policy

stays in force

Fixed uaranteedPays faceamount if policy

is in force when

death occurs

Universallife

uaranteed minimum interest

rate on the investmentsaccumulated in the accounts!

"nterest rates are based on

bonds only (not stoc#s) and

can be higher than the

minimum guaranteed

Flexible, set by

policyholder$ used

to pay mortalityrates and expenses,

then remainder is

invested

%epends on the

account valueminus surrender

charges

Aption *@

maintains le)el

death benefit

Aption B@ face

amount

increases as

accumulated

cash )alue grows

Variablelife

&he 'mutual fund policy,

intended to #eep death

benefits apace with inflation$technically, a security as well

as insurance

Fixed

Not guaranteed$

depends on

investment performance of

stoc#s

inimum face

amount that can

be greater ascash value

changes

Variable

universal

life

*ombines the premium and

death benefit flexibility of a

universal life policy with the

investment choices in stoc#s

of variable life

Flexible, as in

universal life

Not guaranteed$

depends on

investment

performance of

stoc#s

+ame options are

universal life

Renewability

%f the policyholder wishes to continue the protection for more than one term, the insurer

will reCuire a new application and new e)idence of insurability. The ris of being turned

down may be handled by purchasing renewable term insurance. The renewability

option gi)es the policyholder the right to renew the life insurance policy for a specified

number of additional periods of protection, at a predetermined schedule of premium



rates, without new e)idence of insurability. 2enewability protects insurability for the

period specified. *fter that period has elapsed, the insured must again submit a new

application and pro)e insurability.

9ach time the policy is renewed, the premium increases because of the insureds

increasing age. Because the least healthy tend to renew and the most healthy tend to

discontinue, the renewable feature increases the cost of protection. The renewable

feature, howe)er, is )aluable in term life insurance.

Convertibility

* term life policy with a con)ertibility option pro)ides the right to con)ert the term

policy to a whole life or another type of insurance, before a specified time, without

pro)ing insurability. %f, for e0ample, at age twenty=eight you buy a term policy

renewable to age si0ty=fi)e and con)ertible for twenty years, you may renew each year

for se)eral years and then, perhaps at age thirty=si0, decide you prefer cash )alue life

insurance. ?our moti)ation may be that the premium, though higher than that of the

term policy at the age of con)ersion, will remain the same year after year> the policy can

be ept in force indefinitely> or you may want to include cash )alues among your

in)estments. %f you become uninsurable or insurable only at higher=than=standard

&called substandard' rates, you will find the con)ertibility feature )ery )aluable.

-ost life insurance con)ersions are made at attained age premium rates, meaning that

the premium for the new policy is based on the age at the time of the con)ersion. The

insured or policyowner pays the same rate as anyone else who can Cualify for standard

rates based on good health and other insurability factors. The option results in no

Cuestions about your insurability.

Death Beneft Pattern



The death benefit in a term policy remains le)el, decreases, or increases o)er time. 9ach

pattern of protection fits specific needs. 1or e0ample, a decreasing term policy may be

used as collateral for a loan on which the principal is being reduced by periodic

payments. *n increasing amount of protection helps maintain purchasing power during

inflation. The increasing benefit is liely to be sold as a rider to a le)el benefit policy.

-ortgage protection insurance is decreasing term insurance> with each mortgage

payment, the face )alue of the insurance decreases to correspond to the amount of the

loan that is outstanding. Atherwise, mortgage protection is lie other decreasing term

policies.Before buying a mortgage protection policy, consider the pros and cons of

paying off your mortgage at the time of death. <ill your spouses income be sufficient to

meet the mortgage paymentsD %s the interest rate liely to be attracti)e in the futureD

<ill the after=ta0 interest rate be less than the rate of growth in the )alue of the house,

resulting in fa)orable le)erageD redit life insurance is similar to mortgage protection.

%n credit life insurance, the death benefit changes, up or down, as the balance changes

on an installment loan or other type of consumer loan.

Premium Patterns

*n insurers rates for nonsmoers may be E! percent or so lower than those for

smoers. 2ates for women are less than for men &see the bo0 hould /ife %nsurance

2ates Be Based on FenderD; inhapter "7 +/ife ycle 1inancial 2iss+'. The yearly

renewable term contract usually has a table of premiums that increase each year as the

insured ages and as time elapses since insurability was established.

2eentry term allows the insured to demonstrate insurability periodically, perhaps e)ery

fi)e years, and Cualify for a new &lower' select category of rates that are not initially

loaded for ad)erse selection. %f the insured cannot Cualify for the new rates, usually

because of worsening health, he or she can either pay the higher rates of the initial





premium table &ultimate rates' or drop the policy and try to find better rates with

another insurer.

Summary: Features o Term Lie

%n summary, in term life we see the following features &see also Table "(."

+haracteristics of -aor Types of /ife %nsurance Policies+'@

• eath benefits@ le)el or decreasing

• ash )alue@ none

• Premiums@ increase at each renewal

• Policy loans@ not allowed

• Partial withdrawals@ not allowed

• urrender charges@ none

hole Lie Insurance

<hole life insurance, as its name suggests, pro)ides for payment of the face )alue upon

death regardless of when the death may occur. *s long as the premiums are paid, the

policy stays in force. Thus, whole life insurance is also referred to as permanent

insurance. This ability to maintain the policy throughout ones life, instead of a specific

term, is the ey characteristic of whole life insurance.

There are three traditional types of whole life insurance@ &"' ordinary or straight life, &'

limited=payment life, and &3' single=premium life. The differences among them is in the

arrangements for premium payment. &ee hapter 6 +*ppendi0 + for a sample

straight whole life policy.'



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Strai!ht Lie

The premiums for a straight life policy are paid in eCual periodic amounts o)er the life of

the insured. The rate is based on the assumption that the insured will li)e to an

ad)anced age &such as age ninety or "!!'. %n effect, the insured is buying the policy on

an installment basis and the installments are spread o)er the balance of the lifetime, as

e0plained earlier in our discussion of the le)el premium concept. This pro)ides the

lowest possible le)el outlay for permanent protection.

*s shown in 1igure "(.3 +Proportion of Protection and ash Galue in Ardinary /ife

ontract &%ssued to a -ale *ge Twenty=1i)e'+, the le)el premium policy consists of a

protection element and a cash )alue element. The cash )alue builds o)er time, and

e)entually, when the insured is ninety or one hundred, the cash )alue will eCual the face

)alue of the policy. %f the insured is still ali)e at this ad)anced age, the insurer will pay

the death benefit as if death occurred. By this time, no real insurance element e0ists.

The options a)ailable with regard to this )alue are discussed later in this chapter. *

basic straight life policy typically has a face amount &death benefit' that remains le)el

o)er the lifetime. The pattern can change, howe)er, by using di)idends to buy additional

amounts of insurance or by purchasing a cost=of=li)ing adustment rider.

Limite"#Payment Lie

/ie straight life, limited=payment life offers lifetime protection but limits premium

payments to a specified period of years or to a specified age. *fter premiums ha)e been

paid during the specified period, the policy remains in force for the balance of the

insureds life without further premium payment. The policy is paid up.; * twenty=pay

life insurance policy becomes paid up after premiums ha)e been paid for twenty years, a

life=paid=up=at=si0ty=fi)e becomes paid up at age si0ty=fi)e, and so on &see 1igure "(.E

+Protection and ash Galue 9lements for ingle=Premium and %nstallment 1orms of

ash Galue /ife %nsurance+'. The shorter premium payment period appeals to some

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buyers. 1or e0ample, a life=paid=up=at=si0ty=fi)e policy ends premiums around the time

many people e0pect to begin li)ing on retirement pay. %f the insured dies before the end

of the premium=paying period, premium payments stop and the face amount is paid.

These policies are mainly sold as business insurance where there is a need to pay fully

for a policy by a certain date, such as the time an employee will retire.

Sin!le#Premium Lie

<hole life insurance may be bought for a single premiumHthe ultimate in limited

payment. -athematically, the single premium is the present )alue of future benefits,

with discounts both for in)estment earnings and mortality. ash and loan )alues are

high compared with policies bought on the installment plan &see 1igure "(.E +Protection

and ash Galue 9lements for ingle=Premium and %nstallment 1orms of ash Galue /ife

%nsurance+'. ingle=premium life insurance is bought almost e0clusi)ely for its

in)estment features> protection is )iewed as a secondary benefit of the transaction.

Figure 19.4 Protection and Cash Value Elements for SinglePremium and Installment Forms of

Cash Value !ife Insurance









"ote# $%&othetical 'alues not dra(n to scale.

Investment $s%ects

The typical buyer of life insurance, howe)er, does not e0pect to pay income ta0es on

proceeds from his or her policy. %nstead, the e0pectation is for the policy to mature

e)entually as a death claim. *t that point, all proceeds &protection plus cash )alue' of life

insurance death claims are e0empt from income ta0es under ection "!"&a'&"'. %n

practice, most policies terminate by being lapsed or surrendered prior to death as needs

for life insurance change.



/ife insurers offer participation in portfolios of moderate=yield in)estments, such as

high=grade industrial bonds, mortgages, real estate, and common stoc, in which cash

)alues are in)ested with potentially no income ta0 on the realiIed in)estment returns.

Part of each premium, for all types of cash )alue life insurance, is used to mae

payments on the protection element of the contract, but the protection element also has

an e0pected return. This return is eCual to the probability of death multiplied by the

amount of protection. Thus, the need to pay for protection in order to gain access to the

cash )alue element of a single=premium or other in)estment=oriented plan should not be

)iewed as a consumer disad)antage if there is a need for additional life insurance

protection. The participation &di)idend' feature of a policy has a maor effect on its cost

and worth.

Partici%ation Feature

-utual life insurers ha)e always sold their term and cash )alue life products on a

participation basis. toc life companies ha)e also made limited use of participating

policies. Participating whole life contracts pay di)idends for the purpose of refunding

higher=than=necessary premiums and sharing company profits with policyowners. Thus,

as in)estment returns escalate abo)e pre)ious e0pectations, or as mortality rates

decline, the policyowners share in the success of the insurer.

i)idends allow the sharing of current profits from in)estments, mortality assumptions,

e0pense estimates, and lapse e0perience with the policyholder. %n)estment returns

usually ha)e more influence on the siIe of di)idends than do the other factors. The fact

that insurer in)estment portfolios tend to ha)e many medium= and long=term bonds

and mortgages that do not turn o)er Cuicly creates a substantial lag, howe)er, between

the insurers realiIation of higher yields on new in)estments and the effect of those

higher yields on a)erage portfolio returns that affect di)idends.



Participating whole life insurance continues to be a maor product line for mutual

insurers. ales illustrations are used by agents in presenting the product to the

consumer. 1or products with the participation feature, di)idends proected for long

periods into the future are a significant part of the sales illustration. Fenerally, the

illustrations are based on the current e0perience of the insurer with respect to its

in)estment returns, mortality e0perience, e0penses, and lapse rates.

Summary: Features o hole Lie

%n summary, in whole life we see the following features &see also Table "(."


• eath benefits@ fi0ed le)el

• ash )alue@ guaranteed amounts

• Premiums@ fi0ed le)el

• Policy loans@ allowed


• urrender charges@ none

&niversal Lie Insurance

#ni)ersal life insurance contracts were introduced to the maret in "(7( to bolster the

profits of stoc insurance companies. #ni)ersal life insurance policies offer competiti)e

in)estment features and the fle0ibility to meet changing consumer needs. <hen e0pense

charges &such as mortality rates' are set at reasonable le)els, the in)estment part of the

uni)ersal life contract can be competiti)e on an after=ta0 basis with money maret

mutual funds, certificates of deposit, and other short=term instruments offered by

in)estment companies, bans, and other financial institutions. -ost insurers in)est








funds from their uni)ersal life contracts primarily in short=term in)estments so they can

ha)e the liCuidity to meet policyholder demands for cash )alues. ome other insurers

use in)estment portfolios that are competiti)e with medium= and long=term in)estment

returns. * ey feature of the product is its fle0ibility. The policyowner can do the

following@

• hange the amount of premium periodically

• iscontinue premiums and resume them at a later date without lapsing the policy

• hange the amount of death protection &subect to restrictions'

#ni)ersal life was introduced during a period of historically high, double=digit interest

rates. ales illustrations often proected high in)estment returns for many years into the

future, resulting in illustrated cash )alues that surpassed those of traditional cash )alue

policies. Traditional policy illustrations proected di)idends and cash )alues using

a)erage in)estment returns for a portfolio of securities and mortgages purchased during

periods of low, medium, and high interest rates. onsumers were attracted to the high

new money rates of the early "(8!s, which resulted in uni)ersal life growing to a siIable

maret, with $"E6.3 billion of face amount in !!!. The share of the maret declined

when interest rates declined and it increased as the stoc maret became bearish.

Se%aration o 'lements

Traditional cash )alue life insurance products do not clearly show the separate effect of

their mortality, in)estment, and e0pense components. The distinguishing characteristic

of uni)ersal life contracts is a clear separation of these three elements. This is

called unbundling. The separation is reported at least annually, by a disclosure

statement. The disclosure statement shows the following@

• The gross rate of in)estment return credited to the accountThe ad)ertised rate of

return credited to the account is liely to be higher than the true rate of return



being earned on the cash )alue element of the contract. This issue was discussed

at length in hapter ( +1undamental octrines *ffecting %nsurance

ontracts+ regarding )anishing premiums and maret conduct.

• The charge for death protection

• 90pense charges

• The resulting changes in accumulation )alue and in cash )alue

This transparency permits seeing how the policy operates internally, after the fact.

The insurer maintains separate accounting for each policyowner. The account has three

income items@

• Jew premiums paid

• Fuaranteed interest credited

• 90cess interest credited

The cash outflow items, from a consumer perspecti)e, consist of the following@

• * mortality charge for death protection

• *dministrati)e and mareting e0penses

• <ithdrawals or loans

The difference between cash income and outflow in uni)ersal life becomes a new

contribution to &or deduction from' the accumulation )alue account. GisualiIe this as

the le)el of liCuid in an open container where the three income items flow in at the top

and the outflow items are e0tracted through a spigot at the bottom. *ccounting usually

occurs on a monthly basis, followed by annual disclosure of the monthly cash flows. The

http://2012books.lardbucket.org/books/enterprise-and-individual-risk-management/s13-fundamental-doctrines-affectin.html#baranoff-ch09






steps in the periodic flow of funds for a uni)ersal life policy are shown in1igure "(.5

+1low of 1unds for #ni)ersal /ife %nsurance+. The first premium is at least a minimum

amount specified by the insurer> subseCuent premiums are fle0ible in amount, e)en Iero

if the cash )alue is large enough to co)er the current cost of death protection and any

applicable e0pense charges.

*dministrati)e and mareting e0pense charges are subtracted each period. ome

policies do not mae e0plicit deductions. %nstead, they reco)er their e0penses by

lowering in)estment credits or increasing mortality charges &limited by guaranteed

ma0imums'. *nother periodic deduction is for mortality. The policyowner decides

whether withdrawals &that is, partial surrenders of cash )alues' or policy loans are

made. They cannot e0ceed the current cash )alue. %f the entire cash )alue is withdrawn,

the contract terminates. <ithdrawals and loans reduce the death benefit as well as the

cash )alue.

*fter deductions at the beginning of each accounting period for e0penses, mortality, and

withdrawals, the accumulation )alue is increased periodically by the percentage that

reflects the insurers current in)estment e0perience &subect to a guaranteed minimum

rate' for the portfolio underlying uni)ersal life policies.

The difference between the accumulation )alue and what can be withdrawn in cash &the

cash )alue' at any point in time is determined by surrender e0penses. Surrender

e)&enses and other terms will become clearer as aspects of uni)ersal life are discussed in

more detail in the ne0t chapter sections.

Death Beneft (%tions

1igure "(.6 +Two #ni)ersal eath Benefit Aptions+ shows two death benefit options that

are typically a)ailable. Type * eeps a le)el death benefit by maing dollar=for=dollar

changes in the amount of protection as the in)estment &cash )alue account' increases or

decreases. This option is e0pected to produce a pattern of cash )alues and protection









lie that of a traditional, ordinary life contract. <hen a traditional, straight life contract

is issued, the policy stipulates e0actly what the pattern of cash )alues will be and

guarantees them. %n uni)ersal life contracts, there are illustrations of cash )alues for

thirty years or so, assuming the following@

• * specified le)el of premium payments

• * guaranteed minimum in)estment return

• Fuaranteed ma0imum mortality rates

*nother column of this type of illustration shows )alues based on current in)estment

and mortality e0perience. ompany illustration practices also usually pro)ide a column

of accumulation and cash )alues based on an intermediate in)estment return &that is, a

return between the guaranteed and current rates'.

Figure 19.* Flo( of Funds for +ni'ersal !ife Insurance



, This accumulation 'alue is -ero for a ne( &olic%.

The type B option is intended to produce an increasing death benefit. The e0act amount

of increase depends on future nonguaranteed changes in cash )alue, as described in the

discussion of type * policies. The type B alternati)e is analogous to buying a yearly,

renewable le)el term insurance contract and creating a separate in)estment account.



<ith either type, the policyowner may use the contracts fle0ibility to change the amount

of protection as the needs for insurance change. /ie traditional life insurance contracts,

additional amounts of protection reCuire e)idence of insurability, including good health,

to protect the insurer against ad)erse selection. ecreases in protection are made

without e)idence of insurability. The insurer simply acnowledges the reCuest for a

different death benefit by sending notification of the change. The contract will specify a

minimum amount of protection to comply with federal ta0 guidelines. These guidelines

must be met to shelter the contracts in)estment earnings &commonly called inside

interest buildup' from income ta0es.

Figure 19. T(o +ni'ersal /eath Benefit 0&tions



, Cash 'alues ma% decrease and e'en go to -ero for e)am&le due to lo( in'estment returns or

inade2uate &remium &a%ments.

ost=of=li)ing adustment &A/*' riders and options to purchase additional insurance

are a)ailable from most insurers, as you will see at end of this chapter. A/*

riders increase the death benefit annually, consistent with the pre)ious years increase in

the consumer price inde0 &P%'. Thus, if inflation is 3 percent, a $"!!,!!! type * policy

reflects a $"!3,!!! death benefit in the second year. Af course, future mortality charges

will reflect the higher amount at ris to the insurer, resulting in higher costs of death

protection and lower cash )alues, unless premiums or in)estment returns increase

concomitantly. Aptions to purchase additional insurance gi)e the contractual right to

purchase stipulated amounts of insurance at specified future ages &generally limited to

age forty' and e)ents &e.g., the birth of a child' without e)idence of insurability.

Premium Payments

-ost uni)ersal policies reCuire a minimum premium in the first policy year. %n

subseCuent years, the amount paid is the policyowners decision, subect to minimums

and ma0imums set by insurers and influenced by %nternal 2e)enue er)ice &%2' rules.

)ortality Char!es

*lmost all uni)ersal life insurance policies specify that mortality charges be le)ied

monthly. The charge for a particular month is determined by multiplying the current

mortality rate by the current amount of protection &net amount at ris to the insurer'.

The current mortality rate can be any amount determined periodically by the insurer as

long as the charge does not e0ceed the guaranteed ma0imum mortality rate specified in

the contract. -a0imum mortality rates typically are those in the conser)ati)e "(8! A

-ortality Table. #pdated mortality tables were adopted in !!6 based on the !!" A



-ortality Table, as discussed in Jew -ortality Tables; of hapter "7 +/ife ycle

1inancial 2iss+.

The current practice among most insurers is to set current mortality rates below the

specified ma0imums. -ortality charges )ary widely among insurers and may change

after a policy is issued. onsumers should not, howe)er, choose an insurer solely based

on a low mortality charge. 90pense charges and in)estment returns also factor into any

determination of a policys price. %t is also unwise to choose a policy solely on the basis

of low e0penses or high ad)ertised gross in)estment returns.

'*%ense Char!es

%nsurers le)y e0pense charges to help co)er their costs of mareting and administering

the policies. The charges can be grouped into front=end e0penses and surrender

e0penses &bac=end e0penses'. 1ront=end e0penses are applied at the beginning of each

month or year. They consist of some combination of@ &"' a percentage of new premiums

paid &e.g., 5 percent, with percent co)ering premium ta0es paid by the insurer to the

state'> &' a small flat dollar amount per month or year &e.g., $".5! per month', and &3' a

larger flat dollar amount in the first policy year &e.g., $5!'. #ni)ersal life policies began

with high front=end e0penses, but the trend has been toward much lower or no front=

end e0penses due to competition among companies. Those that le)y front=end e0penses

tend to use only a percentage of premium load in both first and renewal policy years.

Policies with large front=end loads seldom le)y surrender e0penses.

*s most early issuers of uni)ersal policies lowered their front=end charges, they added

surrender charges. <hereas front=end e0penses reduce )alues for all insureds,

surrender e0penses transfer their negati)e impact to policyowners who terminate their

policies. urrender charges help the insurer reco)er its hea)y front=end underwriting

e0penses and sales commissions. Kuestions e0ist about whether or not they create

eCuity between short=term and persisting policyholders. * few insurers issue uni)ersal








policies with neither front=end nor surrender charges. These insurers, of course, still

incur operating e0penses. ome lower operating e0penses by distributing their products

directly to consumers or through financial planners who charge separate fees to clients.

These no=load products still incur mareting e0penses for the insurers that must

promote &ad)ertise' their products through direct mail, tele)ision, and other channels.

They plan to reco)er e0penses and mae a profit by margins on actual mortality charges

&current charges greater than company death claim e0perience' and margins on

in)estment returns &crediting current interest rates below what the company is earning

on its in)estment portfolio'. Thus, e)en no=load contracts ha)e hidden e0pense loads.

90pense charges of all types, lie current mortality rates, )ary widely among insurers.

*d)ertised in)estment returns are liely to )ary in a narrower range.

Investment Returns

%nsurers reser)e the right to change the current rate of return periodically. ome

guarantee a new rate for a year> others commit to the new rate only for a month or a

Cuarter.

The inde0ed in)estment strategy used by some insurers ties the rate of return on cash

)alues to a published inde0, such as rates on (!=day #.. Treasury bills or -oodys Bond

%nde0, rather than lea)ing it to the insurers discretion and its actual in)estment

portfolio returns. This approach also pro)ides a guarantee between E and 5 percent.

ome insurers use a new money rate for uni)ersal contracts. *s e0plained earlier,

the new money rate approach credits the account with the return an insurer earns on its

latest new in)estments. The practice dictates in)estment of uni)ersal life funds in assets

with relati)ely short maturities in order to match assets with liabilities. <hen short=

term rates are relati)ely high, such as in the early "(8!s, the new money approach

produces attracti)e returns. <hen short=term returns drop, as they did after the mid=

"(8!s, the approach is not attracti)e, as noted earlier.



Summary: Features o &niversal Lie

• %n summary, in uni)ersal life, we see the following features &see also Table "(."


• eath benefits@ le)el or increasing

• ash )alue@ guaranteed minimum cash )alue plus additional interest when rates

are higher than guaranteed

• Premiums@ fle0ible

• Policy loans@ yes, but the interest credited to the account is reduced

• Partial withdrawals@ allowed

• urrender charges@ yes

+ariable Lie Insurance

To o)ercome policyholder fears that inflation will erode life insurance )alues, )ariablelife insurance pro)ides the opportunity to in)est funds in the stoc maret.

The theory of )ariable life insurance &and )ariable annuities' is that the prices of the

stoc and other eCuities purchased by the insurer for this product will pro)ide insureds

with access to any in)estment )ehicle a)ailable in the maretplace and will not be

limited to fi0ed=income products. %n)estments supporting )ariable life insurance are

held in one or more account&s' separate from the general accounts of the insurer. This

distinguishes them from in)estments underlying other life and health insurance

contracts.

9ach )ariable life consumer has a choice of in)esting in a combination of between fi)e

and twenty different separate accounts with )arying in)estment obecti)es and







strategies. 1or e0ample, you might add more short=term stability by placing part of your

money in a short=term bond fund while maintaining a significant eCuity element in one

or more common stoc funds. 9ach separate account maes in)estments in publicly

traded securities that ha)e readily determined maret )alues. -aret )alues are needed

to determine the current )alues of cash4accumulation )alues and death benefits. ash

)alues )ary daily, and death benefits )ary daily, monthly, or annually.

Gariable life transfers all in)estment riss to the policyowner. #nlie uni)ersal life, for

e0ample, which guarantees the fi0ed=dollar )alue of your accumulation fund and a

minimum return, )ariable insurance products mae no guarantee of either principal or

returns. *ll the in)estment ris &upside or downside' is yours. ash )alues &but not

death benefits' can go to Iero as a result of ad)erse in)estment e0perience.

,ow It or-s

The 3odel Variale !ife Insurance 5egulation, produced by the Jational *ssociation of

%nsurance ommissioners, sets guidelines that help establish the form of the product.

ertain basic characteristics can be identified.

Gariable life is, in essence, a whole life product that pro)ides )ariable amounts of benefit

for the entire life. %t reCuires a le)el premium> therefore, the out=of=pocet contributions

do not change with changes in the cost of li)ing. This limits the e0tent to which death

benefits can increase o)er time because no new amounts of insurance can be financed by

defining the premium in constant dollars. *ll increases in death benefits must come

from fa)orable in)estment performance.

ontracts specify a minimum death benefit, called the face amount. %n one design, this

minimum stays le)el during the life of the contract. *nother design uses increasing term

insurance to pro)ide automatic increases of 3 percent per year for fourteen years, at

which point the minimum face amount becomes le)el at "5! percent of its original face



)alue. *ssuming continuation of premium payments, the face amount can ne)er go

below the guaranteed minimum.

9ach separate account is, in essence, a different mutual fund. 1or e0ample, one contract

offers fi)e in)estment accounts@ &"' guaranteed interest, &' money maret, &3' a balance

of bonds and stocs, &E' conser)ati)e common stoc, and &5' aggressi)e common stoc.

The policyowner could allocate all net premiums &new premiums minus e0pense and

mortality charges' to one account or di)ide them among any two or more accounts.

urrently, appro0imately 75 percent of separate account assets are in common stocs.

ome policies limit the number of changes among the a)ailable accounts. 1or e0ample,

some contracts set a limit of four changes per year. *dministrati)e charges may

accompany switches among accounts, especially when one e0ceeds the limit. Because

the changes are made inside a life insurance product where in)estment gains are not

subect to income ta0es &unless the contract is surrendered', gains at the time of transfer

among accounts are not ta0able.

%t is assumed that in)estments in the underlying separate accounts will earn a modest

compound return, such as E percent. This assumed rate of return is generally a rate

necessary to maintain the le)el of cash )alues found in a traditional fi0ed=dollar straight

life contract. Then, if actual in)estment returns e0ceed the assumed rate, &"' cash )alues

increase more than assumed, and &' these increases are used partly to purchase

additional death benefits.

The additional death benefits are usually in the form of term insurance. The amount of

term insurance can change &upward or downward' daily, monthly, or yearly, depending

on the pro)isions of the contract. The total death benefit, at a point in time, becomes the

amount of traditional straight life insurance that would be supported by a reser)e eCual

to the policys current cash )alue.



%f separate account )alues fall below the assumed rate, &"' the cash )alue falls, and &'

one=year term elements of death protection are automatically surrendered. The net

result is a new death benefit that corresponds to the amount of straight life that could be

supported by the new cash )alue, subect to the minimum death benefit. These )ariable

aspects are what gi)e the contract its name. The nature of )ariable life insurance, with

one=year term additions, is depicted in 1igure "(.7 +ypothetical Galues for a Gariable

/ife %nsurance ontract+.

Policy loans and contract surrenders can be handled by transferring funds out of the

separate account. /oans are typically limited to (! percent of the cash )alue at the time

of the latest loan. urrenders are eCual to the entire cash )alue minus any applicable

surrender charge.

ome )ariable contracts are issued on a participating basis. Because in)estment

e0perience is reflected directly in cash )alues, di)idends reflect only unanticipated

e0perience with respect to mortality and operating e0penses.

Figure 19.6 $%&othetical Values for a Variale !ife Insurance Contract







"ote# The relationshi& de&icted et(een the actual cash 'alue and the total death enefit is

a&&ro)imate. It has not een dra(n &recisel% to scale.

Gariable life insurance is technically a security as well as insurance. Therefore, it is

regulated by the ecurities and 90change ommission &9'Hwhich enforces the

%n)estment ompany *ct of "(E!, the ecurities *ct of "(33, and the ecurities

90change *ct of "(3EHas well as by state insurance departments. The 9 reCuires that

an applicant be gi)en a prospectus before being ased to sign an application for )ariable

life. The prospectus e0plains the riss and usually illustrates how the death benefit and

cash )alues would perform if future in)estment e0perience results in returns of !, E, 6,

8, "!, and " percent. 2eturns also can be illustrated based on historical e0perience of

the tandard and Poors 5!! toc Price %nde0. Because the product is a security, it can

be sold only by agents who register with and pass an in)estments e0amination gi)en by

the Jational *ssociation of ecurity ealers.

* midrange assumption &e.g., E percent' produces a contract that performs e0actly lie

traditional straight life insurance. The ! percent return would produce the minimumface amount> the cash )alue would be below normal for a period and go to Iero at an

ad)anced age. Because cash )alues cannot be negati)e, the policy would continue from

the time the cash )alues reach Iero until the death without cash )alues. *t death, the

minimum face amount would be paid. The 8 and " percent returns would produce cash

)alues that grow much faster than those normal for an ordinary life policy> the total

death benefit would continue to grow abo)e the minimum face amount. These e0amples

all assume continuous payment of the fi0ed annual premium.

Summary: Features o +ariable Lie

The cash )alue in a )ariable life policy fluctuates with the maret )alue of one or more

separate accounts. eath benefits, subect to a minimum face amount, )ary up or down



as the cash )alue changes. uccess in achie)ing the obecti)e of maintaining a death

benefit that eeps pace with inflation depends on the )alidity of the theory that certain

in)estments are good inflation hedges. *ll in)estment riss are borne by the

policyowner rather than by the insurer. The issuer of a )ariable life policy assumes only

mortality and e0pense riss.

%n summary, in )ariable life we see the following features &see alsoTable "(."


• eath benefits@ guaranteed minimum plus increases from in)estments

• ash )alue@ minimum not guaranteed> depends on in)estment performance

• Premiums@ fi0ed le)el

• Policy loans@ yes



+ariable &niversal Lie Insurance

%n "(85, )ariable uni)ersal life was mareted for the first time. Gariable uni)ersal life

insurancecombines the premium and death benefit fle0ibility of a uni)ersal policy

design with the in)estment choices of )ariable life. This policy is also called fle0ible

premium )ariable life insurance. ome insurers allow all premiums to )ary after the first

year of the contract. Athers specify minimum premiums that would, if paid, continuedeath protection at least through age si0ty=fi)e. Premiums can e0ceed these minimums.

ingle=premium policies are also a)ailable.

/ie the uni)ersal life policyowner, the )ariable uni)ersal life policyowner decides

periodically whether to decrease death protection &subect to the contracts minimum







face amount' or increase death benefits &subect to e)idence of insurability'. Ane design

specifies a fi0ed face amount, lie the type * design of uni)ersal life &see 1igure "(.6

+Two #ni)ersal eath Benefit Aptions+', and allows in)estment e0perience to affect

only cash )alues. *nother design, lie )ariable life, allows the total amount of protection

to increase when cash )alues e0ceed their normal le)el for a straight life contract.

*s with )ariable life, the assets bacing )ariable uni)ersal policies are in)ested in

separate accounts. The choices are lie those for )ariable life policies, and the

policyowner continues to assume all in)estment riss. The flow of funds due to

e0penses, mortality charges, and policy loans for both )ariable and )ariable uni)ersal

wor lie those in uni)ersal policies. The outloo for the sale of )ariable uni)ersal

policies is bright because the contract combines the following@

• The premium fle0ibility of uni)ersal life

• The death benefit fle0ibility of uni)ersal life

• Freater in)estment fle0ibility than uni)ersal life

• The disclosure of uni)ersal and )ariable life

• The ability to withdraw cash )alues as policy loans without any ta0 penalties &this

is an ad)antage in comparison to annuities rather than to other types of life

insurance'

eparate accounts are not general assets of an insurer. Therefore, they are protected in

the e)ent of the insurers insol)ency. The maor drawbac of )ariable uni)ersal life, as

with )ariable life, is the transfer of all in)estment ris to the policyowner.

Summary: Features o +ariable &niversal Lie

%n summary, in )ariable uni)ersal life, we see the following features@







• eath benefits@ guaranteed minimum plus increases from in)estments

• ash )alue@ minimum not guaranteed> depends on in)estment performance

• Premiums@ fle0ible

• Policy loans@ allowed



Current $ssum%tion hole Lie Insurance

%n most respects, current assumption whole life insurance policies wor lie uni)ersal

life. The maor difference is that, similar to traditional whole life contracts, the

premiums are fi0ed. These policies do not ha)e the fle0ible premium arrangements

characteristic of uni)ersal life. ome current assumption designs emphasiIe low

premiums &e.g., $6 per year per $",!!! at age twenty=fi)e' and e0pect the premiums,

with periodic adustments, to be paid o)er the entire lifetime. /ow=premium policies

emphasiIe protection and appeal primarily to families or businesses with modest

incomes. -edium= and high=premium alternati)es for the same initial face amount

might ha)e premiums of $"! and $"5, respecti)ely. They emphasiIe cash )alues in the

protection4in)estment mi0 and reduce the chances of the insurer ha)ing to reCuest

higher premiums to a)oid the contract lapsing in later years.

*fter a current assumption contract is issued, the outloo for prospecti)e &future'

mortality and e0penses can result in periodic increases or decreases in premiums. ome

insurers adust premiums annually> others mae changes at three= or fi)e=year inter)als.

The higher=premium )ersions of current assumption policies usually include a contract

pro)ision allowing the policyowner to stop premium payments and essentially ha)e a



nonguaranteed, paid=up contract for the initial face amount. This )anishing premiums

pro)ision is triggered when the cash=)alue account has a balance eCual to a net single

premium for this amount of death benefit at the attained age. The net single premium is

determined with current &at the time of )anish' in)estment and mortality assumptions.

%f future e0perience with the insurers in)estments and mortality turns out to be less

fa)orable, the single premium may pro)e to be insufficient. The policyowner could

either resume premium payments or let the policy lapse. Thus, the policyowner retains

some financial ris e)en for higher=premium current assumption policies where

premiums ha)e )anished. ee the discussion of )anishing premiums in hapter 7

+%nsurance Aperations+.

*s is characteristic of uni)ersal life policies, minimum guaranteed interest rates are

typically E.!, E.5, or 5.! percent. urrent assumption whole life is technically a

nonparticipating policy, as is most uni)ersal life. /ie uni)ersal life, howe)er, it shares

the insurers in)estment and mortality e0pectations with the insured &through e0cess

interest credits'. %t is sometimes referred to as interest=sensiti)e whole life because of its

participatory in)estment feature. The accumulation )alue and cash )alue are

determined in the same manner as was described earlier for uni)ersal life policies.

The death benefit is usually a fi0ed, le)el amount, analogous to a type * uni)ersal life

contract. ome insurers, howe)er, offer an alternati)e death benefit eCual to the original

stated face amount plus the accumulation fund balance, analogous to a type B uni)ersal

life design.

*n annual disclosure statement shows the current in)estment credit, mortality charge,

any applicable e0penses, and surrender charges. *lthough the premium is not fle0ible,

the current assumption product pro)ides far more fle0ibility and transparency for

consumers than is a)ailable in traditional whole life policies.

Summary: Features o Current $ssum%tion Lie

http://2012books.lardbucket.org/books/enterprise-and-individual-risk-management/s11-insurance-operations.html#baranoff-ch07






%n summary, in current assumption life, we see the following features@

• eath benefits@ fi0ed

• ash )alue@ guaranteed minimum plus e0cess interest &lie uni)ersal life'

• Premiums@ )ary according to e0perience, but no higher than a set ma0imum

• Policy loans@ yes


•

urrender charges@ yes

General Factors of Success.docx

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