A model to design and price a credit life insurance product with additional benefits provided in form of a term life policy

Abstract

The major Objective of this study is to design and price a credit life insurance product with additional benefits that achieves a profit margin of at least 5%. The product is designed to pay the loan outstanding on either death, disability, or critical illness to the borrower. The product also provides an additional benefit inform of a term policy for the term of the loan. The additional benefit will be paid out as a lump sum to the family members on death of the borrower. The key assumptions made were interest rate, discount rate, management expenses, and commission charged. Profit testing technique was used and different computations used to determine the premium and profit margin for different ages. The results of the profit tests show that the product is more profitable with female lives at young age (below 50 years). Profitability is observed to be highest for shorter loan terms. It is also observed that the profitability will increase with increase in the annual premium rate charged. The additional premium charged leads to increase in the premiums collected to cover the extra death benefits to the beneficiaries. Profit is observed to be highest for terms around 20 – 40 years and lowest for terms greater than 40 years. Furthermore, sensitivity analysis shows that risk discount rate, interest rate and critical illness benefit are the most sensitive assumptions whereas expenses, interest rate charged on the loan do not greatly affect the profitability of the product. In conclusion, the additional benefit will provide additional benefits for the beneficiaries of the client although it comes with extra premium charged that will make acquiring the loan expensive.