Life Insurance – a RISK – SHARING business

- Fund together in preparation

- Small loss to bigger losses

Type of Risk

1. SPECULATIVE RISK – loss or gain

2. PURE RISK – no possible gain either loss or no loss

Law of Probability

- This is used determining the number of people dying & living at a particular age within a given period.

Law of Large Number – more frequent a particular event is observe

Risk Selection
Anti selection – high pre disposition for those with impairments to purchase life insurance

Factors in risk selection

POFMAR
Physical
Occupation
Financial
Moral Hazard
Avocation
Residence/ Travel

Sources o Information
1. Application form
2. Medical Examination report
3. Agents Confidential Report
4. Medical Information Database

Accept
1. Standard
2. Substandard = addition premium

Life Insurance policy – Insurance Code P.D 1460

A contract whereby a PARTY for a consideration agrees to pay ANAOTHER a SUM of MONEY in the event of his
DEATH FROM ANY CAUSE NOT EXCEPTED IN THE CONTRACT, or upon surviving a specified period or otherwise on
the continuance or cessation of life.

Life Insurance policy

Party – Insured [person] & Insurer [Company]
Consideration – premium payment / policy payment
Another – Beneficiary – designated to receive the insurance proceeds upon death
Sum of Money – proceeds/face amount face value – amount stated in the policy as payable under a life insurance
policy f the insured dies while the policy is in force.
Death from any cause excepted in the contract – excluded risks
Specific period / continuance – maturity period

Premium – consideration other term

Death Benefit – amount payable upon death of insured. In a percentage %

Mature Benefit – he amount payable if the insured outlive the protection period (at age) lonesome

Cash Values – guaranteed amount received in case the plan terminated prior to death the insured or maturity of
the policy.

Dividends = return of excess premium paid annually to owner of insurance policy based on insurer’s performance
and experience over a given year.

Mortality + Interest = NET PREMIUM

Expense + (Safety Margin Requirement) = LOADING
Net premium + Loading + GROSS PREMIUM
Types of Premium
1. Natural premium – by age
2. Level premium – year to year paying period

Classification of basic plan

1. Nature
2. Participation
3. Coverage

Types of Term Plans

1. Level Term – remain constant
2. Decreasing Term – decreases over the term of the coverage. ( example loan)

Individual life
- Provide protection to one person only. There is only one insured in this type of plan.
- May be payable annually, semi-annually or Quarterly basis.

Group Life – provides protection to a group of people

Riders
- Are supplemental contracts that when attached to the basic policy will provide additional benefits at
minimal cost
- Its referred to as a rider because it needs a basic policy to ride on to be effective

Types of Riders
1. Accidental death benefit
2. Waiver of premium due to disability
3. Payor’s Benefits
4. Guaranteed Insurability Option
5. Term Insurance Rider
6. Family Income Rider

Types of Contracts
- Valued Contracts and contracts of indemnity
- Informal and formal contracts
- Unilateral and bilateral contracts
- Aleatory and commutative contracts
- Contracts of adhesion and bargaining contracts

Conditional Receipt
- In most cases when an advisor receives the premium

Policy Loan – right to loan against the cash value

Incontestability – 2 years after the policy has been in force the company cannot contest its validity
Dividends – for participating policyholders / dependent on mortality experience, investment earning and expenses
Dividend Options –
1. Cash
2. Reduced premium
3. Interest
4. Paid-up Addition
5. Yearly Renewable Term
Beneficiary – designated to receive the proceeds of the policy
Primary – first line
Secondary – next on line

Settlement
1. LUMP SUM – single sum payment of the proceeds
2. INNTEREST EARNING will be paid out regularly

Annuities – purchase of income / primarily used as an income stream

Ethics – unethical practices
1. Twisting
2. Knocking
3. Overloading
4. Rebating
5. Misrepresentation
Part 2

Concept of VUL Variable unit of life (combination)

Universal Life – unbundled, flexible premiums, death benefit (no investment)
Variable Life – Fixed premium, minimum death benefit, with investment.

Traditional Policies vs Non traditional Policies

a. Traditional – Term, Whole life and endowment
b. Non Traditional policies - - VUL (investment]

VUL advantages
1. Diversification
2. Professional Management
3. Flexibility
4. Access
5. Administration
6. Transparent Charges
7. Investment Risk
8. Client is Involved

Peso Cost Averaging – The idea is simple spend a fixed peso amount at regular intervals on a particular investment
or portfolio regardless of the unit price.

How can we maximize the return of the fund?

1. Regular Top ups
2. Habit of Saving
3. Buy Low, sell high
It Complements peso cost averaging

Financial Planning – core of variable universal life.

1. GOALS – education, retirement
2. PERSONAL CIRCUMSTANCES
3. Risk Tolerance
4. Financial resources

Financial Planning Process

Set Goals  specific goal
Analyze Resources  current status funds
Evaluate Investment Option Categorized goals – DONT invest in something you don’t understand
Implement the Plan  avoid procrastination (saka na)
Evaluate the Plan  regular process revised time to time
Types of Investment Assets IF- ME –CP
1. Fixed income securities – fixed principal amount, time and rate of interest
a. Money Market Securities – cash and deposit
b. Bonds – Government, corporate and convertible bonds
2. Equity Securities – Stocks or share holder
3. Common Trust Fund – BSP
4. Mutual Funds – open end investment company (SEC)
5. Property – something own any tangible or intangible
6. Insurance – a promise of compensation for specific potential future losses.

Types of Funds
1. Stocks or Equity Funds – invest s in shares of stock may be volatile / mainly to generate long term for
capital appreciation through investment.
2. Bond Funds – invest mainly in long term debt – aims to generate fixed regular income.
3. Balance Funds – invests in both shares of stock and debt instruments mixed type 1 & 2
4. Money Market Funds – invest purely in short term – bank deposit (parking facility funds ) like insurance.
5. Cash Funds - invests in cash and other forms of bank deposit (low risk) lenders
6. Specialized Funds = restrict investment to a particular country or region income securities

Types Of Variable Contracts

1. Single pay - one time big time pay.
2. Regular pay – premium are paid regularly, taking premium holidays.
Currency
1. Peso
2. Dollar

Type of pricing Method

1. Single pricing method
2. Dual pricing method

Types of charges
1. Policy Fee
2. Mortality / Assurance Charges
3. Unallocated premiums
4. Full withdrawal charges
5. Investment Management charges (Bid offer spread & Funds Management Fee)

Type of life insurance LINKED to Investment Funds

a. SINGLE PREMIUM INVESTMENT WHOLE LIFE PLAN
i. The amount of insurance protection is a percentage (usually 125%) of the single
premium
ii. For long term saving and investment offers nominal life protection
iii. Top up are allowed
iv. Right to withdraw full or partial units

b. REGULAR PREMIUMS INVESTEMENT WHOLE LIFE PLAN

i. Paid on regular intervals for investment & life protection
ii. Life protection is the priority
iii. Premium holiday or tops ups are allowed
iv. Partial & full withdrawal are allowed

c. INVESTMENT LINKED INDIVISDUAL PENSION PLAN

i. Usually involves a high allocation of the premium contributions to investments through
simply accumulating the fund to retirement
ii. No life insurance cover other than return of investment funds
iii. There are tax advantages for employees

d. INVESTMENT LINKED PERMANENT HEALTH INSURANCE

i. Provides health coverage such as disability income
ii. Contain cash value unlike the traditional health plans

e. INVESTMENT LINKED DREAD DISEASE INSURANCE

i. A policy which advances the whole sum assured in the event of he diagnosis of a critical
illness.

Definition of terms
Unit Pricing – process whereby the unit price is et
Offer price or selling price – the price which the insurer uses to allocate units to policy when premiums are paid
BID price or buying price – price which the insurer will give for the units if the policyholder wishes to cash in or
claim under policy
Top – ups – single premium injection which can be used to buy additional units
Premium holiday – refers to the cessation of premium payments on a variable life insurance contract for a period
with a view to continue it later on
Forward Pricing – pricing structure wherein the buying the selling prices of units are determined at next valuation
date
Allocation of premiums – means the periodic distribution of premiums to insurance and units
15 day cooling off period – the contract may be returned within 15 days of receipt by policyholder
Grace period- 30 days grace period
Policy fee – it covers setting up and administrative expenses
Mortality Charges – it cover mortality cost (dependent on age)
Unallocated premiums = a part of the premium being deposited for marketing & setting up expenses of the policy
Full withdrawal charges – deducted when the policy is fully withdrawn
Bid-offer-spread = it is imposed on each investment funds (0.5% - 2% per annum) – used to cover investment
expenses
Fund Swithching Charge = facility for transferring from one fund to another/ Limited number of swithches
Computation of VUL

Single Premium example – 100,000

Total Charges (200+3000) = 96,800 (Net available for investment)

1. Policy Fee
2. Administrative & Mortality Charge 3%

Total = NET Available for Investment

Units Purchased & Remaining

Offer Price (selling) Bid Price (Cancellation)

Total /1.50 1.4 (4 decimal places) withdrawal

Units Bought = 64,533.33

Policy amount withdraw = 90,346.66 ( BID price is the price for cash in or claims

Important Formulas
1. No of units = single premium/ unit price rounded down to 4 decimal places
2. BID price = offer price (1-spread%) or BO1S
3. Offer price = BID pride/ ( 1 – spread %) or OB/1S
4. Yield Interest = (Full withdrawal Value / single premium) 1/n – 1
5. Accumulation of funds = x(1 + i) n

Accumulation of fund over a period of time

- To compute for the accumulation of fund over a period of time where the amount is X after n years and it
increase by i (interest rate) we will you use this formula X(1 + i) n

Example
What is Php 20.00 after 10 years if it increases by 5% annually?
20(1 + 0.05) 10 = Php 32.58

80% secure passing rate