eCompaniesInsuranceandPensionPlansChapter 3RiskManagementandFinanciallnstitutions3e,Chapter3,CopyrightJohnC.Hull2012
Insurance Companies and Pension Plans Chapter 3 Risk Management and Financial Institutions 3e, Chapter 3, Copyright © John C. Hull 2012 1
Types of Life Insurance (pages 41-45)Term lifeWhole lifeVariable lifeUniversal lifeEndowment lifeGroup life2RiskManagementandFinancialInstitutions3e,Chapter3,CopyrightJohnC.Hull2012
Types of Life Insurance (pages 41-45) ⚫ Term life ⚫ Whole life ⚫ Variable life ⚫ Universal life ⚫ Endowment life ⚫ Group life Risk Management and Financial Institutions 3e, Chapter 3, Copyright © John C. Hull 2012 2
Costof WholeLifeInsuranceCompared with Annual Premium(Figure3.1)7000060000Costperyear50000400003000020000AnnualPremiumSurplus1000004555657075804050603RiskManagementandFinanciallnstitutions3e,Chapter3CopyrightJohnC.Hull2012
Cost of Whole Life Insurance Compared with Annual Premium (Figure 3.1) Risk Management and Financial Institutions 3e, Chapter 3, Copyright © John C. Hull 2012 3 0 10000 20000 30000 40000 50000 60000 70000 40 45 50 55 60 65 70 75 80 Cost per year Surplus Annual Premium
Investment of Surplus Some contracts allow the policyholder tochoose how the surplus is investedThere are tax deferral advantagescompared with a regular investmentbecause no tax is paid until there is apayout on the policyRiskManagementandFinancialInstitutions3e,Chapter3,CopyrightJohnC.Hull20124
Investment of Surplus ⚫ Some contracts allow the policyholder to choose how the surplus is invested ⚫ There are tax deferral advantages compared with a regular investment because no tax is paid until there is a payout on the policy Risk Management and Financial Institutions 3e, Chapter 3, Copyright © John C. Hull 2012 4
Annuity Contracts (pages 45-46)Typicallyalumpsumpaymentisusedtobuyalife-time annuityAnnuity can be fixed or variableAnnuity can start immediately or be deferred Accumulated value can depend in a complicatedway on the performance of stock indicesThere may be penalty-free withdrawals5RiskManagementandFinancialInstitutions3e,Chapter3,CopyrightJohnC.Hull2012
Annuity Contracts (pages 45-46) ⚫ Typically a lump sum payment is used to buy a life-time annuity ⚫ Annuity can be fixed or variable ⚫ Annuity can start immediately or be deferred ⚫ Accumulated value can depend in a complicated way on the performance of stock indices ⚫ There may be penalty-free withdrawals Risk Management and Financial Institutions 3e, Chapter 3, Copyright © John C. Hull 2012 5