Life Insurance Policy(Elvis Zhang)

LifeInsurancePolicy•Acontractbetweeninsurerandcustomer•Insurermakesapromisetopaybenefitsinexchangeforpremiumspaidbycustomer•Benefitsarepaymentondeath(insureddies)andsurvival(insuredisthenliving)ifany•Term-deathcoveronlyforatermperiod•WholeLife-deathcoverforwholeoflifetime•Endowment-termplussurvivalpayment(maturitybenefit)atendofterm•PureEndowment-survivalbenefitonlyatendofperiod•LifeEndowmentSpecial,LES-wholelifepluspaymentofcoupons(survivalbenefitsatregularinterval)•ModifiedAnticipatedEndowment,MAE-endowmentpluscouponsLifeContingencies•Actuarialmathematicstocomputedeathandsurvivalbenefits,premiums,etc•Deathbenefitispaymentcontingentupondeathofinsured•Survivalbenefitispaymentcontingentuponsurvivalofinsured•Bothdeathandsurvivalareallfutureevents•Tocalculatepresentvalueofdeathbenefit-determinetheprobability,(orchance)thatinsureddiesineveryyearinthefuture,timesitbysuminsured,thendiscountwithinterestbacktopresent•Tocalculatepresentvalueofsurvivalbenefit-determinetheprobabilitythatinsuredisstilllivingeveryyearinthefuture,timesitbythecouponvalue,thendiscountwithinterestbacktopresent•DeathandsurvivalbenefitsarepaymentsdiscountwithmortalityandinterestTheoryofInterest•Valueofmoneyincreasesovertime•Theincreaseistheinterest•Yearendvalueisyearbeginningvalueincreasedbyinterest,oryearbeginningvaluetimes(1+i)whereiistheinterest•Yearbeginningvalueisyearendvaluediscountedwithinterest,oryearendvaluetimesv,whichis1/(1+i)•Accumulatedvalue,valueatendofannyearperiodisperiodbeginningvaluetimes(1+i)^n•Presentvalue,valueatbeginningofannyearperiodisperiodendvaluetimesv^nMortalityTable•Mortalitytablesareconstructedtocalculateprobabilityaninsureddiesduringayear(oraperiodoftime)orsurvivesattheendofayear(oraperiodoftime)•Mortalitytablesarebuiltfrompastexperience,deathdatacollectedduringaperiodoftime•Populationtablesarefromgovernmentvitalstatistics•Standardmortalitytablesusedinpricingandreservevaluationarebuiltfrominsuredexperiencedatawithmargins•Mortalityratesaretabulatedfromage0to100•Agecanbeagenearestbirthday,agelastbirthdayoragenextbirthday•TherecanbeselectandultimatetablestoreflectbetterexperiencefortheearlyperiodfollowingunderwritingNon-forfeitureValues•Mortalityratesincreasewithage,andtheincreasebecomessteepafterage65•Moneymustbesetasidetobuildupthereserveforthefuturecouponsandmaturitybenefit•Premiumsarelevelthroughoutthepolicyterm•Premiumsarethereforemorethanenoughtopayforthebenefitsintheearlyyears•Ifpremiumstops,theexcesscashaccumulatedduringtheearlyyearsbelongtothecustomerandshouldnotbeforfeited•Thenon-forfeitureoptionsandvaluesareregulatedbylawNon-forfeitureOptions•Cashvalueisthecashtobepaidbacktocustomerifpremiumstopsandpolicyterminates•Ifpremiumstopsandthereisnocashvalue,thepolicylapsesi.e.terminateswithnovalue•Ifpremiumstopsandthereiscashvalue,theelectednon-forfeitureoptionwillapply.•APListousecashvaluetoadvanceapolicyloantopayforthepremium•RPUistousecashvaluetopurchaseareducedsumassured,withsameorsimplifiedproductstructure•ETIistousecashvaluetoextendsameprotectionforaslongasitlasts.Ifcashvalueismorethanenoughtopayforwholeperiod,thenthebalanceisusedtopurchasepureendowmentatperiodend.IfthereisstillmoneyleftafterPEofsamesumassuredispurchased,theexcesscashvalueisrefundedorlefttoaccumulatewithinterestTraditionalProducts•Intheearlydaysproductsweresimple-termtocoverdeathforatermperiodandwholelifeforwholeoflife.Endowmentwasforprotectionandsavings.•InUSmutualcompaniesofferedparticipatingpolicies.Premiumsbuiltinmarginsinexpense,mortalityandinterest.Whenexperiencewasbetterthanexpectation,surplusaroseandwasdistributedincashdividendstopolicyholders.•InUK,surpluswasdistributedinreversionarybonus,paid-upsumassured.•Allpremiumswereinvestedinonesinglepooledlifefund.Rateofreturnwasbasedonaportfolioofoldandnewinvestmentsandreturns•Investmentswereusuallyindeposits,bonds,mortgagesandcommercialrealestatesInterestSensitiveProducts•Inflationratewentveryhighinlate1970s,bondyieldsaccordinglysurgedfrom5-6%toover20%•Onesinglepooledlifefundtodeterminerateofreturnfordividenddidnotworkwellanymore.•Investmentsweredividedintonewmoneyandoldmoneyfunds.Policydividendsweredeterminedbasedonweightingsinnewmoneyandoldmoneyfunds,usuallygroupedbyyearofinvestment.•Interestsensitiveproductswerelaunchedwithdividendspaidaccordingtoshorttermnewmoneyrates.•Singlepremiumwholelifeproductswithratesvariedbynewmoneyratesbecamepopular.UniversalLifeProducts•Universallifeproductswereevolvedfrominterestsensitiveproductsandwerepossiblethankstoadvancementintechnology•Traditionalproductsassumecontinuouspremiumpayments.Policyvaluesincludingdividendsarebasedonpaid-to-dateanddeterminedfrompre-settables.•Policyvaluesofuniversallifeproductsarecalculatedfromfirstprinciplesandcashflowrecordsareusedtotrackpolicyvalues.•Theproducthasuniversalfeatures-premiumamountandpaymentcanbechangedanytime,sumassuredcanbechangedanytime,cashvaluecanbetakenoutanytime,etc.VariableLifeProducts•Anotherdevelopmentwasvariablelifeandannuityproducts.Againthiswasnotpossiblewithoutcomplexcomputersystems.•Investment