The successful management of a life insurance company is not a simple undertaking, since all the factors mentioned above interrelate. Consider what might happen if a particularly misguided company were to cease requiring medical examinations for people of middle age taking out substantial whole-life policies (where premiums are payable throughout life). All over the country, professional advisers faced with overweight clients in sedentary jobs with general poor health would quickly steer them to this company where they would be able to take out policies for which any other company would charge them far more highly.
The careless company could wake up three years later when the actuary did his sums and discover that its claims were far higher than predicted � because it had taken on a lot of higher-than-average risks - and that the assets acquired by the premiums of policyholders of this class were insufficient to meet the expected liabilities.
All the company could do at this point would be to adjust its premium rates upwards for future new business (bolting the stable door) and transfer funds from its reserves to cover the claims, such a transfer being at the expense of either the shareholders in the company or the policyholders, or both.
The general trend in life insurance over the past two decades has been towards greater sophistication in the investment-oriented policies, which have been refined and adapted to many different uses.
There has also been a tendency for protection either to be incorporated in "packages" alongside investment-oriented policies or to be "tacked on" when an investment-oriented policy is sold.
Unfortunately this runs counter to the needs of many people, but we are now starting to see protection policies advocated on their own merits.
Since the administration costs of all policies are more or less equal (in terms of documentation, registration, etc.) many companies argue with some justification that the "package" is a more economical way for the individual to buy life insurance, especially if the premiums are low. But in some cases (especially when the premiums are larger) the individual can get better value by purchasing the protection and investment portions of the package separately.
This distinction between saving/investment on the one hand and protection on the other cannot be emphasised too heavily. The essential, basic, form of life insurance is protection and for most people this is the main need. Longer-term saving is an option only those with surplus income and sufficient protective cover can really afford to consider.
The effect of these factors emerges only over a long period, and is restricted to two types of policy: those that guarantee the payment of the sum assured at a specific date or on earlier death (endowment policies) and those that guarantee the payment of the sum assured on death whenever this occurs (whole-life policies). Shorter-term protection policies (term assurances), where the sum assured is payable only on death within a specified period with no return to the policyholder on survival, allow the actuary to calculate with greater precision the necessary sums to be accumulated, and therefore the... see: Endowment policies and whole-life policies