The Nature of Term Insurance

A term policy in life insurance may be defined as a contract which furnishes life insurance protection for a limited number of years, the value of the policy being payable only if death occurs during the stipulated term, but in case of survival nothing being paid. This policy can be issued for a period as short as one year or may provide protection up to age 65 or 70. Actually, these policies can be written for periods of five, ten, fifteen or 20 years. Such policies can only be insured for the agreed term of years only may be renewed for successive term periods.

Term insurance applications are carefully underwritten and various restrictions are imposed by many countries on the issuance of term contracts, such as those limiting the size of the policy to a certain amount or the age beyond which it can renewed. This type of policies are especially designed to indemnify the loss of the capitalized earning value of the insured life.

Shortly, pure term insurance can be justified under the following sets of circumstances.

a- Term insurance guarantees a potential estate not only for persons with small income for the present, with family obligations on their hands, but with good prospects for the development of a carrier, but also for the average worker who has a little prospect or inclination for a carrier but wants only an accumulation of an investment fund which he could secure him as best as it can during his working years.

b) It serves as a hedge against the possible loss of the business asset in the event of the early removal by death of the person behind the enterprise.

c) It protects one’s insurability. AS the incomes and the families grow, the need for life insurance becomes greater. Through the conversion feature in Term insurance, this can also be under possibility.

d) It is a supplement to invest insurance, for persons of ordinary means, during the child-raising period.

e) It is a hedge against loss in the estate already sustained where the owner of the estate is not good financially. These people served by Term Insurance. In future, they will appreciate the value of life insurance.

Read more about Life Insurance Contracts in United States ( Term Insurance 2).

We explain other life insurance contract types (annuity and others) on the other posts.

Life Insurance Contracts in United States ( Term Insurance 1) is a post from: Buy Sell Annuity

By knowing the number of persons constituting a group of a given age and the number of persons dying during the year, the probability that a person of a given age will live one year to the number of persons dying during the year, the probability that a person of given age will live one year to the number living at any given age, the expected number living at the beginning of the next succeeding year may be determined. The process is repeated for each age until a year is reached in which the number dying equals the number living at the beginning of that year.

The rate important to life insurance premium calculations is the mortality rate of insured lives rather than of a mixture of insured and uninsured lives. At first, one can though that; it might seem reasonable to use the same mortality rations based upon insured lives to construct tables for both life insurance and annuities. Since annuities provide for periodic payments from a given date throughout the life-time of the annuitant, the longer the annuitant lives the greater will be the income in the form of premium payments for the life insurer. Therefore, while a decreasing trend in mortality rates is a factor of safety for life insurance computations; it tends to make the table unsafe for annuity computations. Also, in the case of life insurance then longer the insured lives the greater will be the income in the form of premium payments for the life insurer.

As life insurance business is highly competitive, from year to year mortality improvement has been reflected in lower premium costs to the individual buyer. A mortality table which is presented to the National Association of Insurance Commissioners in 1941, is known as the Commissioners 1941 Standard Ordinary Mortality Table. The table is based upon the statistics of life insurance experience during the ten years 1931-1940 inclusive. After the adoption of this table it is regarded as a progress in insurance legislation and started to use all around the world.

Actually, in less than a decade the table became in many respects obsolete. Later, National Association of Insurance Commissioners adopt a new table called the Commissioners 1958 Standard Ordinary Table. This table has been adopted for use mainly in U.S.A. by all States for policies issued after 1965.

The Purpose and the Basic Construction of the Mortality Tables is a post from: Buy Sell Annuity

Since the obligation of the life insurers to pay benefits depends upon a life contingency, they should get to know the expected life span of an insured group. All these probabilities can be measured by an instrument called the mortality table, this is a table showing the probable death rate at each age and by starting with a given number at a given age, it shows how many people will probably die during each succeeding year.

Life insurance actuaries have been able to construct tables showing the mortality experience of large groups of people. Applying the principles of probability and large numbers, they have found that they can predict rather closely the number of death and the time of their occurrence in any large group.

The size of the group is built up by accumulating like cases over a long period of time and as the groups are increased over time, the actual results tend to equal the expected results.

Any table to be used by a life insurer is the responsibility of the actuary. The actuary needs the mortality table in order to:

a-) To calculate premiums b-) To calculate non-forfeiture benefits on lapse or surrender c-) To vale contract liabilities d-) To calculate gains and losses from insurance operations and e-) To calculate dividends on participating contracts. The table serves also a standard for the measurement of the mortality experience in any particular field or group.

An actuarial department is headed by the company actuary, who frequently is a company officer. The actuarial staff varies with the size of the organization, it needs, and the nature of the business. They may be an associate actuary or a number of assistant actuaries and mathematicians. The work of the actuarial department is closely allied with that of the medical department and for this reason the work of the medical director in company organization plans may be cleared through the office of the actuary.

A Basic Concept of Life Insurance is a post from: Buy Sell Annuity

From a different perspective in U.S.A. it is possible to say that no group of workers have made big income gains since 1970′s, but average earning for women of almost every age and education have grown while average earnings for must men have declined. Among both man and woman, the earnings of younger, less educated workers have done much worse than earnings of other groups.

Despite the slow growth in worker’s incomes, income per capital the usual measure of living standards have continued to increase largely because of changes in family and household structure. Woman’s increasing participation in the labor and low birth rates have meant more for two-earner families and fewer children in each family, both of which help to increase income per capita (which is the income of each man, woman and child).

The same democratic changes are reshaping the family income distribution. Much of this change represents the income gap between the growing number of female-headed families and the growing number of two earner families. Withing the family income distribution, it is seen that the incomes of families with children are becoming significantly less equal. One-sixth of all children in U.S.A. new live in families with income under U.S. Dollars 10.000 a year.

According to the examinations, it is reasonable to forecast that today’s young college educated worker will earn more than his college educated father by a modest amount. But the future of today’s young high school educated worker is seen less certain unless the country returns to very rapid economic growth.

Considering the situation in U.S.A. for the point of economic growth one can be sure that, they give importance to human kind and think that it is valuable. Depending on this fact and being an industrialized country, they are also conscious of the benefits of the insurance issue and give importance mostly to life insurance for its high necessity especially in old age as an extra income.

Annuity Insurance

Essentially of Life Insurance is a post from: Buy Sell Annuity

Individual accounts are often advocated as a way of increasing economic growth by encouraging greater national savings and capital investment. Savings can be increased only if current consumption is reduced, however, which presumably requires that the individual account plan involve some combination of higher tax payments or pension contributions by current workers and lower pension payments to current retirees. To be effective in raising national savings, the plan must also minimize the chance of offsetting changes in the non–Social Security portion of government budgets.

Mandatory approaches are more likely to lead to increased savings than are voluntary approaches; approaches that are financed through increases in individual tax or pension contribution payments are more likely to increase national savings than are approaches financed from the government budget; and clearly separating the funds flowing into the individual accounts from the rest of the government’s fiscal operations is more likely to prevent offsetting changes in other parts of the government budget.

Improving the implicit rate of return probably the argument cited most frequently in favor of individual accounts relates to the positive impact on the rate of return that workers receive on their pension contributions. Achieving higher implicit rates of return also requires that individual accounts be structured to minimize administrative costs while maximizing investment returns, a feat that presents one of the most formidable challenges to designers of individual account proposals. Individual account plans can involve rather substantial administrative charges .These charges reduce the net return to the worker and weaken the case for creating the individual accounts in the first place. Among many supporters of individual accounts, the ability of individuals to make their own decisions about how their money will be invested would have value even if it had no direct impact on the implicit rate of return received on pension contributions.

Some individual account proponents would extend this argument to include the greatest possible choice about when to start drawing down accumulated assets and the speed with which such assets should be drawn down once retirement begins. Individual control over investment strategies can also have the advantage of countering the risk of political interference in investment decisions, but it often does involve higher administrative charges.

Annuity and Individual Accounts

The Objectives of Individual Accounts is a post from: Buy Sell Annuity

Firstly, everybody can agree on the expanding necessity of production in the maintenance of full employment and a healty economy. Inevitably, during the period of growing; economy needs capital to finance new factories, machines, production and marketing research, materials and labor.  One should point out the stage, in the historical development of the American economy when lost of financing business could be done by individual financiers or by small combinations of them. If we look at American economy today, it is seen that; it is too large and complex which depends on that type of financing. On the other hand, life insurance companies, by investing fund that flow to them from their many policy holders, Through this way, they make available to industry the savings of millions who themselves never would or could invest directly in business. Furthermore, millions who have few other savings or investments of any kind have created sizable savings in the cash values of their life insurance. These savings have been put to work in American business and industry. Without offsetting savings of the masses, the financing of business expansion would entail methods which would be highly inflationary. Therefore, life insurance makes a contribution toward counteracting inflation.

Through the combined savings of over 200.000.000 Americans, life insurance forms a huge investment pool. Today, this investment pool; combined assets of the legal reserve companies of the country and the amounts reach well over $ 200.000.000. It can be said that approximately 44% of this total invested in securities of business and industry.

Secondly, apart from the supplying capital funds to business and industry life insurance is an important source of financing in a number of other important economic activities. The investment department of life insurance companies are always seeking the most favorable investment return. If we go back to World War II, it is seen that U.S. government securities became a large portion of life insurance company investments. When in the post-war period business and industry had a heavy demand for capital funds to be used in retooling for civilian production, corporate securities became is leading channel for new investment of life insurance funds. In the same period, when home building is expanding enormously; mortgage financing took the lead in life insurance company investing.

Thirdly, in addition to the support that life insurance gives to business and industry in America through its investment in their securities, it rends to stabilize business structure by considering the three main factors which are; reducing risk, establishing credit, reducing the necessity of liquidation under unfavorable circumstances.

It is known that small business units are predominant in the American economy. The sole proprietorship, the two or three-man partnership, and the small, close corporation which is often called “the incorporated partnership”. In such type of partnership, one can imagine that the loss of a key figure or a principal in the enterprise, either by death or disability, is one of the major risks. In order to reduce and eliminate this risk, life insurance can be used. By doing so, it not only stabilizes the business more attractive. Here, policies on the lives of owners of a liquid capital themselves but also are a source of an improved credit rating for the business.

Fourthly, one could say that the economic contributions of life insurance and its social contributions are interrelated to each other. Whatever life insurance does to stablize business and industry in U.S.A. the contribution are not only economic but also social as well. Life insurance makes important contributions to social welfare. Foremost, among these contributions is the prevention of economic will. This prevention enables life insurance to contribute to the social organization of the nation by assisting in the maintenance of the family unit which is the basis of the social structure. Lastly, one could add that, life insurance helps families in planning the education of their children. According to the situation in United States, many young men and women have attended collage on the proceeds or cash values of life insurance.

page 14

Social and Economic Values (Life Insurance) is a post from: Buy Sell Annuity

For American citizens, life insurances alone is available for the protection of the life value against the mentioned three types of death which has no substitute. In most of the countries, insurance protection is being though as gambling. But if one thinks adequately he or she will find out that the gamble is a peculiarly selfish one. Since the below, in the event that the gamble is lost this falls upon an innocent household whose economic welfare should have been the family head’s first consideration. Life insurance is the opposite of gambling. Its basic purpose is to create certainty for people out of the greatest uncertainty which one can confronted. People see easily that property insurance protects the individual against the loss of property already in existence whereas life insurance serves the same purpose but it also does more.

It protects the insured against the financial consequences that result from a loss of his time through premature death, living death, by guaranteeing to him the full estate that he had resolved to accumulate but was prevented from completing because of an untimely death.

According to an American family which agrees the necessity of life insurance, death of one of the partners (wife and children) legally dissolves a business partnership but; we know that many of the most serious financial problems come to stage. Such problems by giving assurance to the surviving partner that the business will be kept intact despite the termination of the partnership and to the deceased partner that the heirs will receive the full monetary woth of his interest in the enterprise. Similarly, death legally dissolves the family partnership arrangement, but one can imagine the most serious financial problems that are still remained. In addition to that, at this stage; family life insurance comes forward to meet these problems. It serves to keep the family estate, usually consisting mostly partners (wife and children and in the meantime has given) assurance to the insured, assuming that adequate insurance was taken, that his heirs will receive their just inheritance in his intangible but nevertheless precious life value asset. This so-called life insurance policy is really a life will under the terms of which the insured leaves to his beneficiaries the monetary worth of his life.

Life Insurance for American Citizens is a post from: Buy Sell Annuity

Reform over Defined Contribution
The funded accounts introduced in recent pension reforms have almost always been DC accounts. Pension programs typically operate either on the basis of DB or DC. Under a DB system, retirement benefits are calculated from a formula that sets a specific monthly payment that may be a uniform amount for all recipients or may reflect the average pre-retirement earnings and work history of the individual retiree.
Under a DC system, the contribution rate is specified but the retirement benefit is not. Rather, the pension benefit is simply the annuity value of the amounts that have accumulated in the worker’s account. The DC approach has several important advantages in a system that relies on private management and advance funding, including:
i. Facilitating portability.
ii. Facilitating competition among fund managers and choice about investment
strategies.
iii. Reinforcing political insulation.
The DC approach has several drawbacks, however, including:
i. Requiring workers to assume greater risk.
ii. Contingent liabilities for the government.
iii. Difficulties in providing annuities.
One characteristic commonly cited as an advantage of DC plans is the fact that retirement benefits are more closely linked to lifetime contributions. In fact, however, a DB plan can be structured to produce just as tight a linkage between benefits and contributions.

Reform over Private Management is a post from: Buy Sell Annuity

Reform debates in North America, Japan and Western Europe, on the other hand, tend to focus disproportionately on dealing with the costs of an ageing society. Reform proposals are sometimes characterized as being one of two types, parametric and systemic. Parametric reforms concentrate on changing key parameters that control the size and scope of the pension system. These involve extending coverage to additional industries or occupations, changing the age at which benefits first become available, altering the average benefit paid and adjusting contribution rates. By contrast, systemic reforms concentrate on changing the basic structure of the pension system. In recent years, the most common systemic reform suggestions involve moving to a system that is:
a. advance funded,
b. privately managed, and
c. individual DC accounts.
Reform over Advance Funding
The advance-funding concept is commonly associated with private pensions, where it allows enterprises to match revenues and costs more accurately and provides assurance that pension promises will be met even if the firm that made them is no longer in existence when the worker retires.

Economists and pension analysts generally believe that, under the right circumstances, advance funding of pensions can:
i. Allow a pension benefit to be financed with a lower contribution rate.
ii. Spread the cost of financing retirement income more broadly.
iii. Increase national savings.
iv. Help improve the efficiency of capital markets.
v. Give workers an increased claim on future benefits.

Advance funding has two major drawbacks that have discouraged some countries from using it at the time their pension systems are organized or shifting from PAYG financing once their systems have been operating for some time:
i. Transition costs.
ii. Slow phase-in.
Reform over Private Management

Reform Types and Their Effects (Pension) is a post from: Buy Sell Annuity

As public pension provision has expanded, implicit public debt has grown as well. This was initially because pensions for those already retired when the systems were introduced were financed by the then current workers, with their pensions to be provided by future workers; subsequently population ageing and increases in the generosity of pension promises have resulted in current outlays of many public pension systems growing much more rapidly than annual revenues and the annual increase in accrued liabilities exceeding likely future revenues. The debt represented by these increases in net liabilities is not recognized in public accounts, perhaps because it can be altered to a significant degree by changing the pension promises made. However, although not the same as explicit debt, pension liabilities do need financing once they fall due, and in nearly all countries this threatens to put substantial and increasing pressure on public finances.

Figure II.2 illustrates the prospective demographic transition in some representative OECD countries. A large and rapid increase in the old-age dependency ratio can be seen in the figure. To the extent that population ageing occurs because people live into a longer and healthier old age, the label “dependency” ratio is misleading. Many older people could be working and economically dependent on no one. For example, participation rates among older Japanese workers rose between 1987 and 1995. However, with a major contribution to population ageing coming from the ageing of the baby-boom generation, a considerable increase in the dependency ratio, however measured, is inevitable.

Forecasts for the middle of the 21st century are subject to wide margins of error, but in many cases it seems that the dependency ratio may still be increasing 50 years from now and will also be rising quickly in non-OECD countries. Viewed over a long time scale, all OECD countries appear likely to experience a major increase in dependency ratios, particularly Japan and Italy.

Demographic Trends (Pension) is a post from: Buy Sell Annuity