Life Insurance Why do people buy life insurance? What types of life insurance exist, and how are they different? How would you pick a life insurance policy?

What is life insurance? Why do you need it? Life insurance comes in many different forms. Generally, however, it is protection against the loss of income that would result if the insured (policyholder) passed away. Coverage that a policy provides is called the face value. The named beneficiary receives the proceeds and can be safeguarded from the financial impact of the death of the insured. Beneficiary: person named in a life insurance policy that receives the insurance money in the event of the policyholder’s death Insurance payout to a beneficiary is called the “death benefit”

Remember, all insurance measures your risk versus a pool of policyholders. Risk Factors: Life Insurance Premiums are based on these factors as well as a mortality table, which calculates the average age and probability of death. People with a higher probability of earlier death pay higher insurance premiums. Age Gender Height & Weight Medical record Personal habits (smoker, drinker, drug use) Occupation **Amount of coverage required**

In the event of your death, a life insurance policy could help:: Distribute money to your beneficiaries. Pay off your mortgage so that the house is free and clear of debt. Provide for your children’s college education. Pay for the final expenses of a funeral or estate settlement costs. Provide an emergency fund to handle an unexpected financial crisis. Provide for settlement of your personal debts.

Life Insurance Type 1: TERM LIFE Term life insurance provides protection for a specific period of time (“term”) and pays a benefit only if the policyholder dies during the term. Can be renewed for another term (but is more expensive) Does not earn a cash value-- money paid to the policyholder in the event his or her policy is voluntarily terminated before its maturity (end of term) or the insured event occurs Usual terms range 5-30 years (20 is average) Cheaper when first purchased because it’s temporary; usually preferred by younger adults to get high coverage for a lower cost Sometimes offered through a workplace, called group term life insurance, in place as long as the policyholder works at that company

Life Insurance Type 2: PERMANENT LIFE Permanent life insurance provides protection for a lifetime or to a specified age and gains cash value over time. THREE TYPES! Whole life: life insurance policy with both an insurance and investment portion. Investment portion has cash value, over time, more goes into insurance (closer to end of term) Premiums stay level (the same) over time. 2. Universal life: similar to whole, except cash value can pay any premium payments policyholder misses. 3. Variable life: Insurance with investments in securities. Most risky permanent life insurance policy.

Practice problem: Jack is 40 years old. In 10 years, his house will be paid off and his daughter will have completed college. He wants to take out a 10-year level term insurance policy with a face value of $750,000. The monthly premium is $76. What will be Jack’s total cost over the 10-year term? HINT: Consider how many monthly payments Jack will make. 10 years x 12 mo./year=120 months 120 x $76 = $9,120