Investment for Life Insurance Company

Term Life: for a stated term of life

Whole Life: covers the whole life with cash value

Universal Life: Adjustable death benefit with savings account

Variable Life: Death benefit and cash values linked to the investment selected by investor

Returns:

1. Minimum return
2. Enhanced margin
3. Surplus return – total asset – total liabilities

Risk:

1. Valuation concerns: to limit risk exposure
2. Cash flow volatility
3. Reinvestment risk: insurance company relies heavily on interest reinvestment
4. Credit risk

Liquidity:

1. Disintermediation
2. Asset-liability mismatch: exacerbate disintermediation when interest rate is high
3. Asset marketability risk

Time horizon: 20-40 years

Tax:

Funds transferred to surplus: taxed

Policy holder’s account: tax deferred

Regulation:

1. Eligibility investment
2. Prudent person’s rule (allow high risk component for diversification)
3. Valuation methods

Underwriting cycle