Analyzing The Risks and Optimal Coverage of Universal Life Insurance: An Individual Insurance Demand Model

Document Type : operational

Authors

Abstract

Due to its dual endowment purposes, Universal Life Insurance (ULI) is now known as one of the most accepted life insurances in Iran as well as in the world among policy holders. In this paper, with respect to the basic model of insurance optimal demand, it is for the first time an individual optimal demand model of ULI presented. Besides a microeconomic approach is carried out on ULI optimal coverage, using risk-aversion curves and primary budget line in coverage-premium relationship, in which risks influence the slope of the budget line. These risks are categorized into two groups for ULI, the first of which include insured’s higher age,  job hazard class, personal and family bad health records as well as higher death benefit option. The second group is related to the risks of investment in relation to Annual Participating Interest Rate (APIR) of policy holders. At the first stage, the risks of investment are discussed, which pertain to APIR either as fixed or alternatively average or fluctuating during the period of the life insurance as a result of altering Technical Interest Rate (TIR) around a fixed expected TIR in policy holder’s mind. As average APIR increases, the slope of the budget line decreases inversely towards risk-aversion curves with higher utilities. At the second stage, regardless of APIR effect, the marginal effect of death premium rate causes the slope of the budget line to rotate upward, hence affecting the whole ULI premium amount or proportion of surrender (cash) value and death benefit. Finally as conclusion, simultaneous effects of the above mentioned death and investment risks are discussed

Keywords


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