Short-term Protection

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Short-term Protection

Pure Protective Life Insurance

The fundamental point about pure (or protective) life insurance has already been made. It is designed to protect, not to enrich, and works on the same basis as fire or motor insurance: unless a claim is made no benefit can be paid. There are a variety of policies suitable for different needs and situations.

 

In setting premium rates for short-term protection policies, life insurance companies assess the likely pattern of deaths of policyholders from published Tables of Mortality, the likely pattern of interest rates over the period and the likely level of expenses, and then attempt to set the premium rates at such a level that sufficient funds are available to meet all claims with a small safety margin to spare.

 

These assessments vary from company to company, and so do company expenses, so that the difference between the cheapest and dearest rate on any type of policy may be quite large in percentage terms.



factors determining the annual cost

The factors determining the annual cost of a pure protection policy are the age at entry and the term of the contract, i.e. the number of years it is to run. The younger you are when you take out such a policy, the cheaper a given sum assured will be. For a 30-year-old man the premium rate on a 10-year assurance has to cover the low mortality and claims pattern of the early years and the rising mortality closer to age 40.

 

  • For the 40-year-old, the premium has to reflect not only the higher mortality at 40 compared with 30, but the necessity of accumulating sufficient funds to pay the higher proportion of claims in the years nearer to age 50. Likewise, the longer the period for which the cover is to continue, the higher the premium will be because of the increase in mortality risk.
  • The whole-life policy, which is a permanent protection policy since the sum assured is payable on death whenever this occurs, operates on a different basis.
  • Here the company knows it will have to pay out the sum assured at some point, theonly question being when.
  • With assurances for shorter periods, the question is whether any benefit at all will be paid under the policy.

    So whereas in the former case assets are accumulated towards an inevitable event, and the policy therefore acquires a surrender value for the policyholder, in the latter case there is little or no accumulation since all the funds contributed by policyholders are used up in paying out to the dependants of those who die during the term of their policies.


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Quotation of Rates

Before proceeding further, however, it is worth explaining how premium rates are quoted. The normal practice is to quote an annual rate of premium for a given sum assured, and rates are normally compared in terms of the cost per £111,000 sum assured. In the case of contracts providing an annual benefit rather than a lump sum, rates are compared in terms of premium per £111,000 of annual benefit provided.

Because most statistics show that women live on average four years longer than men, most life insurance companies quote lower premium rates for women. The normal practice is to... see: Quotation of Rates

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