Whole life insurance versus Renewable term insurance. The problems with whole life insurance.

Term insurance:

With term insurance all you pay for and get is protection.  If you die, they pay.

Term insurance rates start very low but go up every year.

Whole life insurance:  

With whole life you are buying a tax-sheltered savings plan as well.  Your policy accumulates "cash values."

Whole life rates start high but remain constant.



Insurance salesmen are eager to sell whole-life policies because their commissions are so much higher.

But you would be wiser to buy renewable term insurance and do your saving separately.  (With renewable policy you are assured of continuing coverage even if your health deteriorates.)


The problems with whole life:

• Many policies pay low interest.
• It is impossible for a non-expert to tell a good policy from a bad one.
• There is tremendous penalty for dropping the policy, as many people do, after just a few years.
• Most young families cannot afford the protection they need if they buy whole life.  The same dollars will buy five or six times term insurance.
• In later years, and particularly beyond the age of 50 or 55, term insurance premiums rise rapidly.  But by then you may have a less urgent need for life insurance.  The kids may be grown, the mortgage paid off, the pension benefits vested.  You will still need to build substantial assets for retirement, and to protect your spouse; but there are better ways to save for old age than whole life.   

Ref:  The Only Investment Guide you'll Ever Need  by Andrew Tobias

Read also:

Term Life Insurance is Value for Money

Financial statements of Life Insurance Companies (A Conceptual Overview)

Life insurance companies offer products that allow people:
(1) to protect themselves or their loved ones from catastrophic events such as death or disability or
(2) to provide greater financial protection and flexibility for situations such as retirement.

A life insurer pools the individual risks of many policy holders.

The life insurers then strives to earn a profit by taking in and/or earning more money than it is required to eventually pay out to its policyholders.

A bizarre fact of the industry is that when an insurer sells a policy, it doesn't really know how to effectively price that policy because it doesn't really know how much it will eventually cost.

Despite the best efforts of a life insurer's actuaries to estimate variables such as future investment returns, policy persistency rates (the length of time that customers keep their policies), and life expectancy, it can take years before the insurance company knows whether it made money on the policy.



Financial statements for life insurers (A conceptual overview).

BALANCE SHEET

ASSETS
On the asset side of the balance sheet are two major items:
(1) investments (the accumulated premiums and fees that an insurer builds up before having to pay out benefits to its policyholders) and
(2) deferred acquisition costs, which is the capitalized value of selling insurance or annuities policies.

For firms that sell variable annuities, separate account assets, which represent the funds that variable annuity owners have invested, constitute a third important asset type.

LIABILITIES
Because variable annuity owners manage their own investments, these assets are segregated and the separate account assets are offset by an equivalent amount of separate account liabilities on the opposite side of the balance sheet.

A life insurer's other liabilities basically consist of the actuarially estimated future benefits that need to be paid to the insurer[s policyholders.


INCOME STATEMENT

REVENUE
The two main sources of revenue are:
(1)  recurring premiums and fees and
(2) any earned investment income.

EXPENSE
The two main expenses are:
(1)  benefits and dividends paid to policyholders and
(2) amortization of the deferred acquisition costs.

Given how few revenue and expense lines there are, it is vital to keep track of their growth trends.

Property/Casualty Insurance Accounting

Property/Casualty Insurance Accounting

Income Statement of Property/Casualty Insurance Company

Premium revenue is also known as earned premium.  This premium revenue is used to fund:

1. Claim payments (loss expense).
2. Sales commissions for insurance agents (commission expenses)
3. Operating expenses (OPEX)

Claim expenses, for example, typically consume 75% of an insurer’s net revenues.

(1)    + (2) + (3) / Premium revenue = Combined ratio

Combined ratio is an insurance company’s key underwriting profit measure.

A combined ratio under 100 indicates an underwriting profit. 

For example:  A combined ratio of 95 means that the insurer paid out 95% of its premium revenue for losses.  The 5% remaining is the underwriting profit.

A combined ratio exceeding 100 indicates an underwriting loss. 

For example:  An insurer with a combined ratio of 105 paid out 105% of its premium revenue to cover losses,  meaning that it had an underwriting loss equal to 5% of revenues.

Companies with combined ratios exceeding 105 for more than a short time have a difficult time recouping their losses via investment earnings, and this type of poor underwriting track record suggests that an insurer’s competitive position is unusually weak.  Insurers unable to earn even the occasional underwriting profit will produce the industry’s poorest returns and may be tempted to accept large investment risks to boost profitability.

Investment income of Insurance companies

Insurers also make money from investment income.  They are often reported as a ratio of premium.

Adding the investment ratio to the combined ratio yields the operating profit ratio.  In many instances, investment income is a key profit determinant because it offsets underwriting losses.

Combined ratio  + Investment ratio  = Operating Profit ratio

Balance Sheet of Property/Casualty Insurance Company 

In addition to float, most insurers invest a large portion of their own retained earnings as well.  The investment account reveals the size of an insurer’s investments relative to its asset base and details the asset allocation employed.

Investment account = Float deployed + Retained Earnings deployed.

Look at the asset allocation of this investment account.  Look for insurers with no more than 30% invested in equities (unless the company is run by Warren Buffett).

Unearned Premiums of Property/Casualty Insurance Company

Unearned premiums represent premiums received but not yet considered revenue.

This oddity reflects an accounting convention.  When an insurer receives a premium, it is deemed to earn it gradually across the year.  After all, if a customer cancels a policy, the insurer must refund that portion of the coverage not consumed.  After six months, an annual auto policy would be 50% earned, and half the premium would be considered revenue.  Before this occurs, the premiums are held in the unearned premium account, and the insurer is free to invest them.

The best property/casualty insurer is one that is able to consistently earn underwriting profits on a large, growing customer base.  In effect, this insurer would be getting paid to profit from investing other people’s money and could retain this float indefinitely (as long as it grows).  Unfortunately, for investors, these situations rarely occur.



Insurance Companies of Malaysia
Click here: https://docs.google.com/open?id=0B-RRzs61sKqRWmp5ZEFEREw4VWM

Term Life Insurance is Value for Money

Buy insurance for PROTECTION.  Don't buy insurance for INVESTMENT.  

For the same protection, term insurance is more affordable than the insurance that gives protection with investment included.

Insurance products that also include investments are unlikely to give spectacular investment returns as these insurance companies are regulated and can invest in certain 'safe and low risk assets' only.

The savings through buying term insurance can then be invested into other investment products that may potentially give better returns.

How much life insurance should I have?

How much life insurance should I have?

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The main purpose of life insurance is to provide the same standard of living for your family and cover your financial responsibilities in the event of your death.


The two most common methods for determining insurance needs are the following:


Rule of Thumb Method - Most commonly used, and easy to calculate. Simply calculate your annual income and multiply this figure by five- to 10-times your annual income. It's a quick method, but not the most precise nor situation-specific.

Actual Needs Method - Here you'll need to compute all of your debts, expenses and inflows in a similar budget and balance sheet format. Once you've done this, you'll want to make sure that you obtain enough insurance to payoff all of the debts (current and future-college for the kids), next you'll want to add a yearly expense cushion (maybe cover five- to 10-years of expenses). When you have these figures, add them together and this is how much insurance you should obtain.

Standard of Living Method - Determine the amount of money the survivors would need to maintain their standard of living if the insured person died. Multiply that amount by 20. The thought process here is that the survivors can take a 5% withdrawal from the death benefit each year (which is equivalent to the standard of living amount) where at the same time the survivors should be able to invest the death benefit principal and earn 5% or better. (For more, see What To Expect When Applying For Life Insurance.)


(This question was answered by Steven Merkel.)

http://www.investopedia.com/ask/answers/09/how-much-life-insurance.asp