Reply To: Risk Associated with a Term Assurance Product
Rishabh Surana
The various risk associated with a Term Assurance Product are as follows:
Mortality Risk : This is the major risk associated with term product.
Anti-Selection Risk (Adverse Selection) : An increase in the chance for a person to take out an insurance contract because they believe their health risk is higher than what the insurance company has allowed for in the premium amount. There will be significant anti-selection risk with the individual version of the contract and a much reduced risk in the case of the group version. Because at times in group contracts, membership of the group may be compulsary.
Expense Risk : When a contract is priced, an assumption will be made about the expected average amount of expenses incurred per policy in force. Because some of the expenses are fixed (ie independent of the number of policies in force) then the actual average expenses per policy will rise if fewer policies are are sold. Thus, there is expense risk for both group and individual business. It can be substantial, particularly if the policy term is long, as the premiums are often relatively small and may well be of fixed amount throughout the term of the policy.
Selective Withdrawals : If someone is particularly healthy, they are more likely to surrender a life insurance policy since they may have less need for the protection. This is one reason why companies are unlikely to offer any surrender or paid-up benefits on withdrawal.
Investment Risk : It is not a major risk as compared to savings product. The funds that build up under a term assurance are small compared with the sum assured. The funds are generally too small for the investment return to have a significant effect, particularly if non-volatile assets are held.
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This reply was modified 5 years, 5 months ago by
Rishabh Surana.
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