Facts About Life Insurance Purpose What You Are Paying For Who Needs It? Purpose “Life insurance” should really be called “death insurance.” It doesn’t keep you alive. Its purpose is to protect the family against financial hardship upon the premature death of a bread winner. What you’re paying for You’re paying for a substitute for income. Legally it is defined as a transfer of risk. You pay a small amount of money to transfer the larger risk of loss of income to the Insurance company Who needs it? Mainly people who have others depending on their income for support. If you die, there will obviously be an emotional loss, but if it would cause a significant financial hardship to the anyone, you probably need Life insurance. A couple of examples would be: -If are married with children and you don’t have a significant amount of money in investments, you need life insurance. -If you are in a partnership and your death would cause the business to have to be sold to compensate your heirs for you percentage of the business, you need Life Insurance -If you’re single, or have significant cash resources, you probably don’t need it.

How Life Works How Life Works According to the “Theory of Decreasing Responsibility (illustrated above), you need for life insurance peaks along with your family responsibilities. When you’re young, you may have young children to support, a new mortgage payment, farm payments, and many other obligations. Yet you haven’t had the time to accumulate much money. This is the time when the death of a breadwinner could be devastating and when you need coverage the most. When you’re older, you usually have fewer dependents and fewer financial responsibilities. Children have grown, the mortgage is paid or reduced, and many routine payments have disappeared. Plus, you’ve had years to accumulate wealth through savings and investments. As a retiree, you no longer need to protect your income for future obligations. At this point, your need for insurance has reduced dramatically, and you have cash to see you through your retirement years. How Life Works

Using Life Insurance in Protecting the Farm Family How much insurance is needed? What kind of insurance do I buy? Unanticipated death of a young parent with children creates economic hardship for a family. The greatest need for economic protection arises when the young family is least able to afford it. When the children are grown and the estate has increased from other investments the need for economic protection may be minimal or none. The two most important questions any buyer of life insurance should focus on are: (1) how much insurance, and (2) what kind to buy.

Areas of Protection (DDIME) Death Expenses Debt cancellation (vs. transfer to heirs) Income or lost services of the deceased Mortgage Education funds Rough rules of thumb suggest an amount equal to 6 to 8 times your annual earnings. (BrokenClock example) However, there are other things to consider when determining how much life insurance you need. Important factors include: income sources (and amounts) other than salary/earnings; whether or not you’re married and, if so, your spouse's earning capacity; the number of people who are financially dependent on you; the amount of death benefits payable from Social Security and from an employer-sponsored life insurance plan, whether any special life insurance needs exist (e.g., mortgage repayment, education fund, estate planning need), etc. Talk to an insurance adviser for a precise calculation of how much life insurance you need. Areas of protection (DDIME Theory) 1. Death/Burial expenses – Insurance may be used to fund funeral costs for the deceased. Debt cancellation (versus transfer to heirs) – Insurance may be used to create a fund to pay off debts of the insured. (Most lenders require a collateral assignment of life insurance as a condition for a loan.) Income or lost services of the deceased – Unless funded by insurance, the surviving spouse who was the caregiver of the children my have to train to enter the job market. If they do work outside the home, expense for day care needs to be considered. 4. Mortgage loans Education funds – Insurance proceeds my be used to pay for children’s education expenses so they can remain in school, or sometimes a surviving spouse that has worked in the home caring for children will need to receive education or training in order to enter the job market. Others…. 6. Emergency reserve fund – Insurance proceeds may be used to assist in paying for sudden expenses following the death of the insured, such as travel expenses and lodging for family members coming from a distance. 7. Bequests – An insured may wish to leave funds to their church, school, or other organization at the time of their death.

What Kind of Life Insurance to Buy? The protection feature of life insurance if more important than the investment feature. There are two basic types of Life Insurance. Insurance with a savings plan (Cash Value aka Whole Life, Universal Life, Variable Life ) and Insurance without a savings plan attached (Term)

Permanent Life Insurance Permanent life insurance is a general term used to refer to various forms of whole life insurance policies that remain in effect to age 100 so long as the premium is paid (include a savings or investment element called cash value). Whole Life is one form of Cash Value Insurance. The Face Amount and the premium remain level until age 100. The excess premium paid builds a cash value designed to endow (Equal the face amount) at age 100 The THREE flaws to Cash value insurance are: You don’t need Life insurance your “whole life” The extra money you pay develops a cash value that is a very poor short term or long term investment The extra money required to build the poor savings plan causes the insurance to be so expensive that you can’t afford the proper coverage Universal life & variable are a form of cash value.

Cash Value Negatives No Cash Value for the first 2-3 years Typically 20% of the premium paid goes towards the cost of insurance and 80% goes to build a cash value that operates under the following rules: No Cash Value for the first 2-3 years Negative return for 5-15 years. Average return is 1.3% Charged 6-8% interest to borrow your own money* Lose cash values when you die *What about borrowing from your whole life (cash value) policy? (Extra information) 1. Interest is charged on a policy loan, even though it may be lower than what you’d pay for a traditional bank loan. You are paying to borrow your money. If your money was accumulating in another investment fund, you could withdraw your earnings without paying interest. Although, withdrawing funds may affect long-term earnings and penalties may apply. 2. Loans may reduce your death benefit. If you borrow from your policy, but die before you’ve paid back the loan, your death benefit will be reduced by the amount borrowed plus interest. With term insurance and a separate investment fund, withdrawals from savings do not affect your life insurance protection. 3. Potential tax benefits are often used as a selling point for some versions of cash value policies. But as with any other investment, you should exercise caution when a large portion of the benefit is based on complex tax law considerations. Be aware that: Tax laws are subject to change. You cannot be sure that these current so-called tax breaks will be there when you need them. These potential tax benefits are based on complex assumptions. If your situation varies from the norm, you may be subject to future tax liabilities that could dwarf any promised benefits. Relying on promised tax benefits to justify any investment is risky. It would be wise to seek the advice of a qualified tax expert – not life insurance salespersons – when considering tax consequences of your investments.

Can You Afford Bundling The chart below shows the difference in the industry average premium per thousand dollars of protection between term insurance and cash value insurance. As you can see, the premium for “two for one” policies is drastically higher than term! This difference in premium per thousand can add up to several thousand dollars in annual premium. For most families on a budget, a few hundred dollars is a lot of money! The premium for a bundled product may prevent a young farm family from buying the amount of coverage they need. Plus, the money saved with less expensive term policy could be used to build an investment or savings program.

Term Life Insurance Term life insurance is temporary life insurance provided for a specific period of time (also known at pure life insurance protection). Term life insurance (also known at pure life insurance protection) is temporary life insurance provided for a specific period of time 10,15,20,25,30 years. The amount of insurance and the premium will stay level for a specified period of time. Term policies provide the greatest amount of coverage for the lowest premium. Term insurance offers pure death protection. Life insurance is not a permanent need that every family has – many financial experts see it as a simple way to simply “buy time” until you accumulate savings, not as a permanent fixture in your financial program Many consumer advisors recommend affordable term life insurance with a separate investment program outside the policy (the “Buy Term and Invest the Difference” concept). The “difference” means the savings in premium charges between term and cash value life insurance. With this model, you have greater control over your benefits. Because protection and savings are completely separate, you can better control both death benefit and the investment portion.

Insurance to Cover Farm Debt Only Decreasing Term Insurance Mortgage Insurance Credit Insurance Decreasing Term policies feature a level premium and a death benefit that decreases each year over the duration of the policy term. Decreasing term is primarily used when the amount needed protection is “time sensitive”, or decreases over time. Decreasing term coverage is commonly purchased to insure the payment of mortgage or other debts if the insured dies prematurely. The amount of coverage thereby decreases as the outstanding loan balance decreases each year. A decreasing term policy is usually convertible; however, it is usually not renewable since the death benefit is $0 at the end of the policy term. Decreasing term is the least expensive form on the term insurance coverage's. How does mortgage protection term insurance differ from other types of term life insurance? Some companies offer various types of specific-coverage insurance, such as mortgage insurance. These are nothing but life insurance policies! If you want to assure that your home would be paid for in the event of your death, simply add more coverage to your primary insurance policy. The same is true of short-term life policies like credit life, which is nothing more than an expensive from of decreasing term. Although the salesperson may sometimes leave the impression that this is required, it’s not! The face amount under mortgage protection term insurance decreases over time, consistent with the projected annual decreases in the outstanding balance of a mortgage loan. Mortgage protection policies generally cover a range of mortgage repayment periods, e.g., 15, 20, 25 or 30 years. Although the death benefit decreases, the premium is usually level in amount. Further, the premium payment period often is shorter than the maximum period of insurance coverage--for example, a 20-year mortgage protection policy might require that premiums be paid over the first 17 years. Insurance to cover indebtedness of the business is really the same as providing income to the family. If a farmer dies and leaves enough insurance to cover the debt, the family has the farm assets free and clear to provide income. Credit life insurance is frequently recommended in conjunction with taking out an installment loan when buying expensive appliances or a new car, or for debt consolidation. Is credit life insurance a good buy? Credit life insurance is frequently more expensive than traditional term life insurance. Further, if you already own a sufficient amount of life insurance to cover your financial needs, including debt repayment, buying credit life insurance is normally not advisable due to its relatively high cost.

Business Transfer Planning Buy/Sell Agreements Key-Person Insurance Buy/sell agreements – This is a legal contract that determines what will be done with a business in the event that an owner dies. This agreement is among partners of a business, or between the owner of a business and a key-employee, obligates the partners heirs to sell their interest to a surviving partner(s) (or key person) at a predetermined price, and the survivor or key person contractually agrees to by at that price. This means the business will not have to be liquidated to compensate the deceased heirs for their portion of the business’s value. If the business owns the policies, pays the premiums, and is the beneficiary, the agreement is called a Stock Redemption Plan. On the other hand, if the policies are owned, the premiums are paid and the beneficiaries are the other business partners, the plan is called a Cross Purchase Plan. Key-person insurance – A business can suffer a financial loss because off the premature death of a key employee that has specialized knowledge, skills or business contacts. A business can lessen the risk of such loss by use of key person insurance.

Liquidation Versus Retention of Capital Selling assets is a method of raising capital. Retention is the retaining of assets. Selling assets (liquidation) is a method of raising capital. Retention is the retaining of assets. If the principal asset is the home, selling the home would require that the survivors then pay rent. Under the retention of capital approach, enough insurance is purchased so that when added to other liquid assets, there is enough to pay income benefits without invading capital.

Looking at My Current Policy Type of insurance Amount of Insurance Premium – Is the premium level? Length of Policy Beneficiaries Convertibility Renewable Activity here is to have the ladies look at their insurance policies and find all of the above.

How to Pick a Life Insurance Agent Does the agent take the time to get to know you and your needs? Does the agent help you understand your options? Does the agent present a clear analysis. Do you feel pressured? Do they have a license to sell insurance in your state? A DON’T – “How Much Do You Have to Spend” Does the agent take the time to get to know you? While it's important for an agent to know the insurance world, it's just as important for the agent to really know you and your family situation to help you make the right decision. A good insurance agent will ask you lots of questions. (see DDIME) Does the agent help you understand your options? Life insurance is complicated, but a good agent will help you understand your choices. If an agent uses terms you don't understand without taking the time to explain them, they probably aren't right for you. Does the agent present a clear analysis? A good agent will outline the amount of insurance based on your needs. They illustrate the amount of premium you will pay for this amount of insurance and payment options (monthly, semiannually, or annually). Annual payments save you the most on premiums. Do you feel pressured? Insurance agents are paid in part on how much insurance they sell. And most are paid more if they sell permanent insurance. So there are reasons why an agent might push you to buy permanent insurance. But a good agent will not pressure you; they will present you with different options and let you make the final decision. Do they have a license to sell insurance in your state? They must have a license to sell life insurance in your state A DON’T – How Much Do You Have to Spend? This will only get you an insurance policy that matches what you can afford and may not be the right policy for you and it won’t be the right amount. Take time to analyze what is right for you. And remember, according to insurance law, the agent or broker must put all proposals in writing. Don't do business with an agent or broker who doesn't provide you with copies of proposals and documentation on every aspect of your potential policy. Finally, keep in mind that many insurance policy variations are of the "bells and whistles" type, minor differences that don't mean nearly as much as some insurance agents may claim. And one more tip: some salespeople recommend that you don't buy term insurance, or try to talk you out of it, for no other reason than the much higher commission they'll get from selling you whole life or universal.

What to Consider When Replacing a Policy Family needs change Policy outdated Your investment needs better met elsewhere Several separate policies If you have an outdated policy, and can’t find a better value, you may want to consider replacing it. Consider replacement when…. Your family needs change, requiring more coverage. The policy is outdated. Many new policies are cheaper than those offered several years ago, even though you are older. Your investment needs can be better met with other vehicles offering a greater rate of return. You have several separate policies, and you could combine them into one comprehensive policy with a lower premium.

Be Cautious About Replacement When… You are in bad health, uninsurable, or considerably older. You have a good, competitive policy and can’t get a better value for your money. Never cancel your existing policy until the new one has been issued and delivered to you. Your relationship with your agent is more important than having your family covered.

The bottom line…. When considering policy replacement, examine your options carefully! Most companies offer proposals that show the costs and provisions of the policy. As for these illustrations as you shop for the best value. Your goal is financial security – avoid spending more than necessary. Always consider what works best for you and your family – it’s your decision!

Summary – Tips for Making a Wise Insurance Purchase Buy Adequate Coverage Buy Only One Policy Per Family Example: 6 policies x $75 administrative fee = $450 1 policy with riders - $75 $375 With the $375 difference ($450 - $75 = $375), you could buy as much as $325,000 term life insurance at age 30 and pay a full year’s premium.

Summary – Tips for Making a Wise Insurance Purchase Understand the purpose of life insurance on children Avoid expensive “gimmicks” Avoid insurance policies disguised as something else 1. Buy adequate coverage. Strive for enough to really protect your family. It’s tempting to procrastinate or squeeze by with less protection. No one ever thinks tragedy will strike. But the point of insurance is to protect your family in the event of a tragedy! Thousands of families are now struggling because they didn’t take protection seriously! 2. Buy only one policy per family. Life insurance policies generally have a fee that pays for processing and administration of each policy. This can be as high as $50-$100. Separate policies mean separate fees. If you have separate policies on yourself, your spouse and on your children, you could be losing money! A primary policy and a “rider” for your spouse could be more economical. Example: 6 policies x $75 administrative fee = $450 1 policy with riders - $75 $375 With the $375 difference ($450 - $75 = $375), you could buy as much as $325,000 term life insurance at age 30 and pay a full year’s premium. 3. Understand the purpose of life insurance on children. Life insurance on children isn’t necessary in most cases. The coverage on the adults will provide for the children. If you really feel it’s necessary, buy only enough for burial expenses. And remember to purchase the coverage as a “child rider”, not as a separate policy. 4. Avoid expensive “gimmicks.” Remember that extra options on your policy mean extra costs that can prevent you from buying the maximum protection. One possible exception might be a Waiver of Premium benefit, which provides for payment of your premium if you become disabled for a period of time. 5. Avoid insurance policies disguised as something else. Some companies offer various types of specific-coverage insurance, such as mortgage insurance. These are nothing but life insurance policies! If you want to assure that your home would be paid for in the event of your death, simply add more coverage to your primary insurance policy. The same is true of short-term life policies like credit life, which is nothing more than an expensive from of decreasing term. Although the salesperson may sometimes leave the impression that this is required, it’s not!