How is life insurance formally defined in a contract context?
An agreement where the insurer pays benefits contingent upon human life in exchange for premiums.
What is the formula for calculating the asset share at the start of a policy ($A_0$)?
$A_0 = P_0 - E_0$
Define the formula for initial capital strain ($C_0$).
$C_0 = V_0 + S_0 - A_0$
In the initial capital strain formula $C_0 = V_0 + S_0 - A_0$, what does the variable $V_0$ represent?
The valuation capital reserve set aside for that specific policy.
In the initial capital strain formula, what does the variable $S_0$ represent?
The required solvency reserves.
Why do life insurance companies typically use level premiums instead of high first-year premiums to cover initial capital strain?
High initial costs make products unmarketable and do not align with public needs or past payment habits.
Into which three broad categories can life insurance products be split?
Protection-type, savings-type, and income-type products.
Which specific life insurance product provides a benefit on death within a specified term but typically nothing if the insured survives?
Term Assurance
What is the primary purpose of a seven-year decreasing term assurance policy regarding UK inheritance tax?
To mitigate tax charges on gifts made within seven years of death which are taxable on a sliding scale.
Define ‘Convertible Term Assurance’.
A policy that can be converted into a whole life policy without the need for new medical underwriting.
What type of term assurance is specifically designed to cover outstanding loans or mortgage repayments?
Decreasing Term Assurance
Why is ‘Selective Withdrawal Risk’ higher in term assurance policies?
Healthier individuals are more likely to terminate policies, leaving a remaining pool with higher average mortality risk.
For decreasing term assurance, why is withdrawal risk particularly relevant to the insurer?
Early termination can lead to losses because the cost of risk is highest initially while premiums are averaged over the term.
Why might options like convertible or renewable term assurance require higher capital towards the end of the contract?
To cover the uncertainty and potential costs related to anti-selection and worsening mortality experience.
What is the function of a ‘Smart Exit’ option in modern term assurance?
It allows the policyholder to exit at older ages to reduce the potential claim strain on the insurer.
What was the previous name for Income Protection (IP) insurance?
Permanent Health Insurance (PHI)
How is the benefit of an Income Protection (IP) policy mathematically described?
As a temporary annuity that continues until the insured recovers, dies, or the term ends.
In Income Protection (IP), why do insurers usually include a deferred period (initial weeks of sickness) before paying benefits?
To lower premiums and align with short-term sickness benefits provided by the State or employers.
In the context of IP, what is the ‘Non-Selection Limit’ (NSL)?
The amount of cover automatically granted in a group scheme without requiring individual medical underwriting.
How does Critical Illness (CI) insurance differ from IP regarding the form of benefit payment?
CI typically pays a lump sum upon diagnosis, whereas IP provides regular income payments during incapacity.
What is the difference between ‘Accelerated CI’ and ‘Stand-alone CI’?
Accelerated CI pays on illness or death (reducing the death benefit), while Stand-alone CI pays only on illness.
Why do stand-alone Critical Illness products require a survival period (e.g., 28 or 30 days) after diagnosis?
To avoid paying on death, which is not priced into the stand-alone product basis.
Concept: Locum Protection Insurance
A policy for professional practices to cover the costs of a temporary replacement if a partner becomes disabled.
What are ‘Activities of Daily Living’ (ADLs) used for in Income Protection insurance?
To provide objective tests for assessing incapacity, such as the ability to feed or wash oneself.
