© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Insuring Your Life #8

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Basic Insurance Concepts Basic purpose of insurance Protect you and your dependents from the financial consequences of losing assets or income when an accident, illness, or death occurs

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Q.1. What are some basic insurance concepts?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Concept of Risk Risk: chance of economic loss There’s a risk anytime you have a financial interest in something Life Health Home Car Business

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Concept of Risk Risk Assumption: choice to accept and bear the risk of loss yourself Example: Bear the cost of replacing stolen textbook Risk Avoidance: avoiding an act that would create risk Example: not driving to avoid a car accident

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Loss Prevention and Control Prevention - reduce chance that loss will occur Example: Driving the speed limit may reduce likelihood of a car accident Control - reduce severity of loss once it occurs Example: Wearing a seat belt can reduce effects of a car accident

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Insurance Insurance Policy -- transferring your risk of loss to the insurance company

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Underwriting Basics Insurance company decides whom to insure and rate to be charged Company must guard against adverse selection – a disproportionate number of bad risks

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Q. 2. What are the benefits of life insurance?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Benefits of Life Insurance Financial protection for dependents Protection from creditorsTax benefitsVehicle for savings

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Do You Need Life Insurance? Consider if Dependents count on your financial support You have debts – home mortgage Maybe Not if No one depends on your support You are a child

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Much Life Insurance is Right for You? Multiple-of- Earnings Method Multiply annual earnings by an arbitrary number Needs Analysis Method Estimate needs and examine available resources

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Q. 3. What are the steps in the need analysis method of life insurance?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Much Life Insurance Do You Need?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Assess Family’s Total Economic Needs Income to maintain lifestyle Extra expenses if income producer dies Special needs of dependentsDebt liquidationLiquidity

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Determine Financial Resources Savings and investmentsSocial Security benefitsPension or retirement plansOther life insurance Income of surviving spouse or children Real estate or other assets

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. This is the amount of life insurance needed to provide your family with desired standard of living Subtract Resources From Needs

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Q. 4. What are the different types of insurance policies?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Term Life Insurance Specified amount of insurance protection for a set period Benefit paid if insured dies during that time Simplest type of insurance policy

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Term Insurance Straight term Coverage remains the same while premiums can increase Decreasing term Premiums remain the same while coverage decreases

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Important Features In Term Insurance Renewability Renew policy without evidence of insurability Renewability Renew policy without evidence of insurability Convertibility Convert to whole life policy without evidence of insurability Convertibility Convert to whole life policy without evidence of insurability

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Representative Annual Renewable Term Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Representative Annual Renewable Term Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Q. 5. What are the advantages and disadvantages of term life insurance?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Advantages Economical way for young families to purchase large amounts of life insurance Provides for needs that disappear over time Disadvantages Premiums become more costly as you get older Does not build cash value Term Insurance

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Whole Life Insurance Cash value Provides death protection plus a savings feature Nonforfeiture right Right to cash value when canceled prior to death

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Cash Value Accumulates In A $200,000 Whole Life Policy

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Representative Whole Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Whole Life Policies Continuous premium (straight life) -- Level premiums paid until death or policy cancellation Limited payment --Level premiums paid for specified number of years, insurance in force until death Single premium --Lifetime coverage purchased with a single premium

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Q. 6. What are the advantages and disadvantages of whole life insurance?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Advantages of Whole Life Savings vehicleBorrow against cash valuePremiums remain constant Cash value accumulates tax-free until redeemed

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Disadvantages of Whole Life Less death protection for young peopleLow return on savingsTax penalties possible on early withdrawal Outstanding loan subtracted from face value of policy upon death

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Universal Life Insurance Permanent cash-value insurance that combines term insurance with tax sheltered savings account Provides death protection plus savings featurePremiums are “unbundled” into 2 accounts Savings grow at current interest rate vs. guaranteed minimum rate Provides flexibility in premiums paid and death benefit

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Q. 7. What are the advantages and disadvantages of universal life insurance?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Advantages of Universal Life FlexibilitySavings Feature

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Disadvantages of Universal Life Changing premiumsChanging protection levels

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Major Advantages and Disadvantages-Life Insurances

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Representative Universal Life Insurance Annual Outlays: $100,000 Policy, Preferred Nonsmoker Rates

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Variable Life Insurance Provides death protection plus a savings or cash value feature Cash value can be invested in mutual funds for greater possible return Returns not guaranteed and actual death benefit can vary

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Representative Variable Life Insurance Values: $100,000 Policy, Preferred Nonsmoker, Male, Age 45

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Other Types of Life Insurance Variable life insurance Combines flexibility of premium payment feature of universal with investment choices offered by variable Group life insurance Usually term insurance offered through employers Premiums usually lower than individually purchased policies

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Other Special-Purpose Life Insurance Credit and Mortgage life insurance Decreasing term insurance Pays off outstanding balance if borrower dies before repaid Costly form of coverage Industrial life insurance Whole life policies with small face amounts For low-income families

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Q. 8. What are the steps in buying life insurance?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Buying Life Insurance Compare costs and features Select a large, highly rated, financially secure company Choose a reputable agent

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Q. 9. What are some key features of life insurance contracts?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Life Insurance Contract Features Beneficiary clause Settlement options Policy loansPremium payments Grace period Nonforfeiture optionsPolicy reinstatement Change of policy

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Other Policy Features Multiple indemnityDisability clauseGuaranteed purchase optionsSuicide clauseExclusionsParticipationLiving benefitsViatical Settlement