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Questions and Answers
What is one of the risks policyholders face when purchasing life insurance policies?
How do interest rate changes affect a life insurance policy's value?
What are early surrender charges associated with?
Why is the mortality risk a key factor in calculating the premium for a life insurance policy?
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Which factor can lead to a policyholder receiving a higher death benefit than expected?
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Why is it important for policyholders to understand conventional life insurance policies?
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What is the main characteristic of conventional life insurance policies?
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What happens if the policyholder survives the term of a conventional life insurance policy?
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What distinguishes with-profits endowment assurance policies from conventional life insurance policies?
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Which type of life insurance policy combines both a death benefit and a savings component?
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What risk do conventional life insurance policies pose to policyholders?
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In with-profits endowment assurance policies, what are the 'bonuses' that the policyholder receives?
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Study Notes
Life Insurance Principles
Life insurance is a contract between an insurer and a policyholder, where the insurer promises to pay a death benefit to the policyholder's designated beneficiary if the policyholder dies during the term of the policy. There are several types of life insurance policies, each with its own set of principles and risks.
Conventional Life Insurance Policies
Conventional life insurance policies, also known as term life insurance policies, provide coverage for a specific period, such as 10, 20, or 30 years. The policyholder pays a premium for the duration of the term, and if the policyholder dies within that term, the death benefit is paid to the beneficiary. If the policyholder survives the term, the coverage ends, and no death benefit is paid. These policies are straightforward and do not accumulate cash value over time.
With-Profits Endowment Assurance Policies
With-profits endowment assurance policies are a type of life insurance policy that combines both a death benefit and a savings component. These policies are typically structured as a single premium, guaranteed-term endowment policy, where the policyholder pays a lump sum at the beginning of the policy term. The insurer invests the premium in a portfolio of investments, such as stocks, bonds, and real estate, and the policyholder receives the return on investment, known as the bonuses, in addition to the death benefit.
Risks to Policyholders
Policyholders face various risks when purchasing life insurance policies. Some of these risks include:
- Insurer's Financial Instability: If the insurer faces financial instability or goes bankrupt, the policyholder may not receive the death benefit promised.
- Interest Rate Changes: The value of a policy's investment component is influenced by interest rate changes, which can either increase or decrease the policy's cash value and death benefit.
- Early Surrender Charges: With-profits endowment assurance policies may have early surrender charges, which are fees that must be paid if the policyholder surrenders the policy before the end of the term.
- Mortality Risk: The risk of the policyholder dying is a key factor in calculating the premium for a life insurance policy. If the policyholder dies earlier than expected, the insurer will pay a higher death benefit than expected, while if the policyholder lives longer than expected, the insurer will pay out a lower death benefit than expected.
Conclusion
Understanding the principles of life insurance, including conventional life insurance policies and with-profits endowment assurance policies, is essential for making informed decisions about purchasing life insurance coverage. The risks associated with life insurance policies, such as the insurer's financial stability, interest rate changes, early surrender charges, and mortality risk, should also be carefully considered when choosing a policy.
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Description
Test your knowledge of life insurance principles, including conventional life insurance policies and with-profits endowment assurance policies. Learn about the types of policies, premiums, death benefits, and risks associated with life insurance coverage.
