Designing a model to price a term life assurance policy that returns premiums and offers policy loans with disability rider

Abstract

The major objective of this study was to design and price a term life assurance product that pays out a lump sum benefit on death, returns a percentage of premiums at maturity on survival of the policy term. This product is designed to achieve a profit margin of 5-30% and also incorporate unique features like policy loan with a disability rider. The key assumptions made include; Interest rate, Expenses, Risk Discount rate, maturity rate, disability rider rate, interest payable on loan, profit loading. These assumptions were used to price the premium rates which were used to project the possible future cash flows associated with this product to ascertain whether it’s profitable. The principle of equivalence was used to design and price the product. Using the methodology stated the following results were obtained. For example a 30 year old male taking out a 10 year policy will pay annual premium of 941,506 Uganda shillings to obtain a sum assured of 10,000,000 Uganda shillings and 7,508,061 Uganda shillings on maturity if he survives the policy term. The above results were tested using the sensitivity analysis by varying the assumptions and the key assumptions that were sensitive to the profit margin include; maturity rate, expense rate and interest rate. Therefore, small change in these assumptions triggers an enormous variation in profit margin. In conclusion, interest rate, maturity rate, and expenses should be monitored regularly and repricing done if they go far from acceptable change. This is possible if there is correct combination of age, policy term, and gender.