chapter 3) Life insurance premiums

Gross Single Premium

-Net premium plus loading expenses. -Mortality (Risk) + Loading - Interest = Gross Single Premium -Example: The gross single premium for Tom's life insurance policy is $775 if his risk is $700, loading is $150, and interest is $75 ($700 + $150 - $75 = $775).

Monthly Premium = Most Expensive

Annual Premium = Least Expensive

Level Premium Funding

In life insurance, the risk of death increases with age. Therefore, the premium must be higher to accommodate the greater risk of older people. This is most apparent in annual renewable term life insurance.

__________ is the most important factor in establishing life insurance premiums. Each applicant poses a different degree of risk. Consequently, the _________ factor varies for each individual. ________ is the death rate for a male or female at certain ages.

Mortality is the most important factor in establishing life insurance premiums. Each applicant poses a different degree of risk. Consequently, the mortality factor varies for each individual. Mortality is the death rate for a male or female at certain ages.

Reserves = Money Set Aside to ____ _______

Reserves = Money Set Aside to Pay Claims

Insurance companies treat reserves as a liability, not an asset because reserves are funds the insurance company must set aside to pay future claims.

State laws regulate the amount of reserves an insurance company must have on hand.

Level Term

Term insurance that provides a level face amount.

The penalty for an agent who continues acting without a certificate of authority will result in a fine of _______________ for each month the violation continues. The correct answer is:

The penalty for an agent who continues acting without a certificate of authority will result in a fine of $100 for each month the violation continues. The correct answer is: $100

only some insurers (i.e., assessment mutuals) have the right to charge additional premium

only some insurers (i.e., assessment mutuals) have the right to charge additional premium

Life insurance rates, or premiums, are calculated based on three factors:

-Mortality -Interest earnings -Expenses

A permanent withdrawal of _________ _______ or surrender is only taxable up to the portion of the surrender that is interest. In other words, if __________ ________ is surrendered, the portion that exceeds the cost basis (premiums paid) is taxable.

A permanent withdrawal of cash value or surrender is only taxable up to the portion of the surrender that is interest. In other words, if cash value is surrendered, the portion that exceeds the cost basis (premiums paid) is taxable.

Premium Concepts for Life Insurance Premium Calculations

Actuaries compute premiums

_________ Premiums = Not Deductible Except for Group

Business Premiums = Not Deductible Except for Group

For policies that are not surrendered, the ______ ________ grows tax-free. As long as the _________ __________ stays in the policy, taxes will never be imposed on any portion, not even the amount that exceeds the cost basis.

For policies that are not surrendered, the cash value grows tax-free. As long as the cash value stays in the policy, taxes will never be imposed on any portion, not even the amount that exceeds the cost basis.

Premium Payment Mode

Frequency at which premium payments are made.

In both life and health insurance, __________ are paid in advance, before a claim is made. These ________ are invested to earn interest. Higher interest rates allow insurers to charge lower _________. ________ are invested to earn interest.

In both life and health insurance, premiums are paid in advance, before a claim is made. These premiums are invested to earn interest. Higher interest rates allow insurers to charge lower premiums. Premiums are invested to earn interest.

Term life policies provide pure death protection only. Each year the policy is renewed, the insured is one year closer to death; the premium must be higher to account for higher mortality.

Term life policies provide pure death protection only. Each year the policy is renewed, the insured is one year closer to death; the premium must be higher to account for higher mortality.

Some life insurance policies allow policyholders to pay one large single premium payment.

This greatly reduces the costs of administering the policy since the insurer only needs to process one payment.

______ ________ consists of premiums paid plus the interest earned on those premiums.

Cash value consists of premiums paid plus the interest earned on those premiums.

Cash value is the ________ portion of a whole life policy.

Cash value is the savings portion of a whole life policy.

When excess premiums are paid in early years, as in level premium funding, the insurance company sets that money aside until needed.

For whole life policies, those that provide death protection and cash value, premiums contribute to cash values. Cash value is simply the savings portion of a whole life policy.

Which of the following are the actuarial tables used by insurers for underwriting? Select one: a. Morbidity tables b. C.S.O. tables c. Insurable tables d. Risk pool tables

The C.S.O. tables are mortality tables that portray the chance of a person dying at a particular age. The correct answer is: C.S.O. tables

Gross Annual Premium

The amount a policy owner actually pays for the policy. Gross Annual Premium = Mortality - Interest + Expenses -Net premium plus loading expenses for one year.

-Insurers' expenses are called loading. -These are the daily expenses of operating an insurance company. Loading is comprised of the following costs:

Acquisition costs: cost of effectuating insurance policies, of which a producer's first year commission makes up the greatest portion Overhead: insurer's salaried staff, rent, and furniture Contingency funds: additional premium may be required if original premium is insufficient - only some insurers (i.e., assessment mutuals) have the right to charge additional premium Immediate claims payments: insurers assume that all claims are paid at the end of the year when establishing rates, when in reality claims are paid all year Insurers' expenses are called loading.

Other factors that impact the premium amount include:

Age, Sex, Health, Occupation, Hobbies, and Habits.

Mortality data is compiled into actuarial tables, which are then used to establish premium rates by demographic. -Mortality tables require a large number of people over great time periods to be accurate. -The 2001 Commissioners' Standard Ordinary Tables, or 2001 CSO Tables, portray the number of years a male or female is expected to live at any given age. Example: A man age 50 is expected to live to age 79.18 and a woman age 50 is expected to live to age 82.69 (data from the 2001 CSO Tables).

CSO Tables are used for two main purposes: they show the life expectancy at any given age, and they are used to establish the death rate for groups of people over a certain number of years. Mortality = Rate People Die

Life insurers base rates on premiums paid annually.

If premiums are paid more frequently, the insurer incurs an additional loading expense because the interest is based on only a partial payment rather than a full year, and the increased administrative costs of processing multiple premium payments.

Interest Earnings

Interest earned on invested premiums.

Here are the exceptions to these rules: Premiums used for a charity are tax-deductible. Life insurance premiums paid by an ex-spouse as court-ordered alimony are tax-deductible. Employer-paid premiums used to fund group life insurance for the benefit of employees are tax-deductible.

Here are the exceptions to these rules: Premiums used for a charity are tax-deductible. Life insurance premiums paid by an ex-spouse as court-ordered alimony are tax-deductible. Employer-paid premiums used to fund group life insurance for the benefit of employees are tax-deductible.

__________ Premiums = Not Deductible

Individual Premiums = Not Deductible

Individual Life Insurance

Insurance that is issued on the life of one individual, with individual underwriting, rates, and coverage.

Whole Life Insurance

Insurance that provides life insurance protection for the insured's entire life, or until age 100. Whole life insurance provides living benefits. Synonymous with permanent life insurance.

Renewable Term

Term insurance that allows the policyowner to renew the term policy after the designated term expires without having to prove insurability.

Term life policies

Term life policies provide pure death protection only. Each year the policy is renewed, the insured is one year closer to death; the premium must be higher to account for higher mortality.

Premium Concepts; Net Single Premium = Mortality minus interest.

The amount needed to fund the entire life insurance benefit. This is the amount if the insured were to only pay one premium. Since it is calculated based on one premium, the expenses are not used as a factor. Net Single Premium = Mortality - Interest

Which factor is the most crucial for underwriting life insurance? Select one: a. Proposed insured's age b. Proposed insured's sex c. Proposed insured's place of residence d. Proposed insured's occupation

The proposed insured's age is most important, as it is the basis for establishing mortality.

#Note: The test makers like to trick you by asking: Which of the following is NOT a major risk factor in determining a premium? A.) Mortality B.) Interest C.) Expense D.) Age/Sex. The correct answer is D.) Age/Sex. They want to trick you with the Age/Sex answer. They seem like major factors, but remember they are not the major factors. The major factors are MIX (Mortality/Interest/Expenses). The mortality factor takes the persons age and sex into consideration so they are not major risk factors.

#Note: The test makers like to trick you by asking: Which of the following is NOT a major risk factor in determining a premium? A.) Mortality B.) Interest C.) Expense D.) Age/Sex. The correct answer is D.) Age/Sex. They want to trick you with the Age/Sex answer. They seem like major factors, but remember they are not the major factors. The major factors are MIX (Mortality/Interest/Expenses). The mortality factor takes the persons age and sex into consideration so they are not major risk factors.

$100,000 face-amount, 3%, J 15 and D 15, Jefferson County, Colorado A rated bonds are traded at 99 3/4 on Friday October 9th. How many days of accrued interest are there? 119 days 133 days 117 days 131 days

June has 16 days ( the 15 th to the 30th is 16 days, be sure to include the 15th when counting), July has 30 days, August has 30 days, September has 30 days, and October has 13 days (the trade settles Wednesday October the 14th, and Ai is calculated up to but not including the settlement date). The correct answer is: 119 days

Life insurance premiums are based on the annual cost of coverage for each $_____ of face amount.

Life insurance premiums are based on the annual cost of coverage for each $1,000 of face amount. Example: Assume a woman purchases a $100,000 life insurance policy at the age of 40 and is rated at $23.78. This means that for each $1,000 of coverage the woman is charged $23.78 per year. Her annual premium is $2,378 ($23.78 x 100 = $2,378).

Face Amount/ face value

The amount of coverage under a life insurance policy. Synonymous with face value.

Deductible

The amount the insured must pay before the insurer will pay for a health insurance claim.

The _________ _______________ ___________ requires that any benefit granted to an individual that has economic or financial value be included as compensation for income tax purposes in the year the benefit is granted.

The economic benefit doctrine requires that any benefit granted to an individual that has economic or financial value be included as compensation for income tax purposes in the year the benefit is granted. The year you're granted any benefits, and you have economic or financial value, it will be included as compensation for income tax purposes in the year the benefit is granted.

Insurance companies employ people to collect and analyze risk data. These people are mathematicians known to the insurance industry as __________. They take statistical data and determine the rate people will die, termed mortality, and the rate people will get sick, termed morbidity.

actuaries.

Premiums paid on individual life insurance policies are generally _____________.

Premiums paid on individual life insurance policies are generally not deductible. -Life insurance policies are considered personal expenses — so they're not eligible for tax deductions.

More frequent premium payments mean higher premiums.

Regardless, most insurers accept premium payments annually, semi-annually, quarterly, and monthly. Home service policies accept weekly premiums.

The policyowner is entitled to their cash value and can take loans out against these cash values.

Reserves, on the other hand, are the amount of money required to pay future claims, with the present value of future premiums taken into account: Future Claims= PV(future premiums) + Reserves

Three Major Factors In Premium Determination

Mortality- Rate in which people are expected to die. (Don't confuse with morbidity, which is used in health insurance.) Interest- Amount that an insurer makes from investing, Expenses- The insurers overhead. Expenses are also called loading. Expenses include: general overhead (rent, utilities etc.), acquisition cost (agent's commissions), claims, and reserves. The test makers like to ask: What type premium factor are an agent's commissions? (Expense)

Summary of Premiums

Net Single Premium: Net single premium includes mortality and interest. This is the total dollar amount required to fund the entire life insurance death benefit. Net single premium = mortality - interest Example: The net single premium for Linda's life insurance policy is $550 if her risk is $650 and interest is $100 ($650 - $100 = $550).

In life insurance, the risk of death increases with age. On average, women tend to live several years longer than men. This is why life insurance premium rates tend to be lower for women. People who are healthy are expected to live longer. Premiums are lower as a result. Occupations and hobbies also impact a person's life expectancy. People who work in dangerous jobs or pursue dangerous hobbies will have higher premiums to account for the added risk. Finally, habits such as smoking and obesity affect the lifespan of a person. Premiums are higher for smokers and those who are overweight.

In life insurance, the risk of death increases with age. On average, women tend to live several years longer than men. This is why life insurance premium rates tend to be lower for women. People who are healthy are expected to live longer. Premiums are lower as a result. Occupations and hobbies also impact a person's life expectancy. People who work in dangerous jobs or pursue dangerous hobbies will have higher premiums to account for the added risk. Finally, habits such as smoking and obesity affect the lifespan of a person. Premiums are higher for smokers and those who are overweight.

-Whole life insurance and level term life provide level premiums. This means the amount of the premium is constant throughout the entire policy. -Level premium policies usually have higher premiums to account for the greater risk of death with advancing age. -With this in mind, level premium policyholders are essentially paying more in the earlier years of the policy, and less in later years than the risk of death warrants. The excess premium paid in earlier years funds the higher premium required in later years.

Whole life insurance and level term life provide level premiums. This means the amount of the premium is constant throughout the entire policy. Level premium policies usually have higher premiums to account for the greater risk of death with advancing age. With this in mind, level premium policyholders are essentially paying more in the earlier years of the policy, and less in later years than the risk of death warrants. The excess premium paid in earlier years funds the higher premium required in later years.

Premiums for life insurance used for __________ purposes are generally not tax-deductible either.

Premiums for life insurance used for business purposes are generally not tax-deductible either. -Life insurance policies are considered personal expenses — so they're not eligible for tax deductions.