 2004 McGraw-Hill Ryerson Ltd. Kapoor Dlabay Hughes Ahmad Prepared by Cyndi Hornby, Fanshawe College Chapter 9 Life, Health and Disability Insurance 9-1

 2004 McGraw-Hill Ryerson Ltd. Learning Objectives - Chapter 9 1.Define life insurance and describe its purpose and principle. 2.Determine your life insurance needs. 3.Distinguish between the two types of life insurance policies and analyze various types of life insurance. 4.Select important provisions in life insurance contracts. 5.Create a plan to buy life insurance. 9-2

 2004 McGraw-Hill Ryerson Ltd. Learning Objectives - continued 6. Recognize how annuities provide financial security. 7. Define health insurance and explain its importance in financial planning. 8. Recognize the need for disability income insurance. 9. Understand the value of supplemental health and disability insurance. 9-3

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 1 Define life insurance and describe its purpose and principle. 9-4

 2004 McGraw-Hill Ryerson Ltd. An Introduction to Life Insurance Life insurance is obtained by purchasing a policy, with the insurance company promising to pay a lump sum to the person specified (beneficiary) at the time of the insured’s death, or sometimes while they are still alive. In some policies money is paid to the policy holder (the insured) if he/she is still alive at a future date Company makes promise to pay in exchange for the payment of a premium 9-5

 2004 McGraw-Hill Ryerson Ltd. The Purpose of Life Insurance The purpose of life insurance is to protect someone who depends on you from financial loss related to your death. Proceeds may be used to; Make charitable bequests upon your death. Provide a retirement income. Provide an education or income for your children Set up an estate plan Pay off a mortgage or debts at the time of Establish regular income for survivors Make estate and death tax payments 9-6

 2004 McGraw-Hill Ryerson Ltd. The Principle of Life Insurance Mortality tables provide odds on your dying, based on your age and sex. Your premium is based on your life expectancy and the projections for the payouts for persons who die. Adjustable for factors that increase/decrease an individual’s risk 9-7

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 2 Determine your life insurance needs. 9-8

 2004 McGraw-Hill Ryerson Ltd. Determining Your Life Insurance Needs Do you need life insurance? Do you have people you need to protect financially? Do you have a partner who works? What are your objectives for life insurance? How much money do you want to leave your dependents should you die today? When you retire what income do you need? How much will you be able to pay for your insurance program? 9-9

 2004 McGraw-Hill Ryerson Ltd. Estimating Your Life Insurance Requirements The Easy Method. Typically, you will need 70% of your salary for seven years while family adjusts. The DINK (dual income, no kids) Method. The “Nonworking” Spouse Method. Multiply the number of years until the youngest child reaches 18 by $10,000. The “Family Need” Method. More thorough than the first three because it also considers employer provided insurance, Social Security benefits, and income and assets. 9-10

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 3 Distinguish between the two types of life insurance policies and analyze various types of life insurance. 9-11

 2004 McGraw-Hill Ryerson Ltd. Types of Life Insurance Policies Term Life Insurance Protection for a specified period of time. If you don’t pay premiums, coverage stops. A renewability option means that at the end of the term you can renew the policy without having a physical. Conversion option allows you to change your policy from term to whole life without a physical. With decreasing term insurance your premium stays the same, but the amount of coverage decreases as you age. 9-12

 2004 McGraw-Hill Ryerson Ltd. Whole life Insurance Whole life insurance also called straight life. You pay a premium as long as you live. Amount of premium depends on your age when you start the policy. Provides death benefits and accumulates a cash value. You can borrow against the cash value or draw it out at retirement. Look carefully at the rate of return your money earns. (continued) 9-13

 2004 McGraw-Hill Ryerson Ltd. Whole Life Policy Options Limited payment policy. Pay premiums for a stipulated period, usually 20 or 30 years, or until you reach a specified age (65). Your policy then becomes “paid up” and you remain insured for life. Participating & Non-Participating Policies participating policy requires higher premiums but insurance company pays dividends if profitable 9-14

 2004 McGraw-Hill Ryerson Ltd. Universal Life Policy Combines term insurance and investment elements Can pay variable premium amounts Increased cash value reflects interest earned; guaranteed not to be less than specific amount Uses current interest rates and can be changed to reflect prevailing rate changes Death benefits flexible 9-15

 2004 McGraw-Hill Ryerson Ltd. Other Types of Life Insurance Policies Group life insurance Term insurance often provided by the employer No physical is required. Endowment Life Insurance coverage from beginning of contract to maturity guarantees payment of specified sum even if insured still alive Credit life insurance Debt is paid off if you die. Protects the lender 9-16

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 4 Select important provisions in life insurance contracts. 9-17

 2004 McGraw-Hill Ryerson Ltd. Life Insurance Contract Provisions Naming your beneficiary, and contingent beneficiaries. Length of grace period for late payments. Reinstatement of a lapsed policy if it has not been turned in for cash. Non-forfeiture clause prevents the forfeiture of future benefits if you drop the policy Incontestability clause stipulates that after the policy has been in effect for a period of time the company cannot dispute its validity Suicide clause during first two years. 9-18

 2004 McGraw-Hill Ryerson Ltd. Life Insurance Contract Provisions Automatic Premium loan uses the cash value to pay the premium if you do not pay it Misstatement of age provision Policy loan provision to borrow against cash value. A rider to a policy modifies it coverage by adding or excluding conditions or altering benefits. Waiver of premium disability benefit. Accidental death benefit - double indemnity. Guaranteed insurability option. Critical Illness Joint, Last to die 9-19

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 5 Create a plan to buy life insurance. 9-20

 2004 McGraw-Hill Ryerson Ltd. Buying Life Insurance Look at your present and future sources of income, savings, group life insurance, group annuities and government benefits. Determine from whom to buy your policy. Examine both private and public sources. Look up the company’s rating. Agent and direct insurer v. broker 9-21

 2004 McGraw-Hill Ryerson Ltd. Buying Life Insurance (continued) Compare policy costs which are affected by... Company’s cost of doing business. Return on their investments. Mortality rate among policyholders. Features policy contains Competition among companies Use interest-adjusted index to compare policies. Takes into account the time value of money. Helps you make cost comparisons among insurance companies. 9-22

 2004 McGraw-Hill Ryerson Ltd. Obtaining and Examining a Policy Submit application to company personal information, type of policy and limits of coverage medical history (may require examination) Before purchase read every word of contract get full explanation of terms and provisions After purchase can cancel policy within 10 days without penalty make copies for lawyers & beneficiaries 9-23

 2004 McGraw-Hill Ryerson Ltd. Choosing Settlement Options Options are the choices for how you want the money paid out. Lump-sum payment is most common. Limited installment plan. In equal installments for a specific number of years after your death. Life income option. Payments to the beneficiary for life. Proceeds left with the company. Pays interest to the beneficiary. 9-24

 2004 McGraw-Hill Ryerson Ltd. Should You Switch Policies? Consumers lose millions because they don’t hold cash life policies long enough or they purchase the wrong policy Switch if benefits exceed costs of getting another physical, and paying policy set up costs. Are you still insurable? Can you get all the provisions you want? 9-25

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 6 Recognize how annuities provide financial security. 9-26

 2004 McGraw-Hill Ryerson Ltd. Financial Planning with Annuities An annuity is a retirement income option that provides you with pre-set installment payments for an agreed upon period of time Issuer invests funds Contracts to repay you, with interest, in predetermined installments over set period of time agreed number of years for life Size of installment depends on amount invested, length of payments and interest 9-27

 2004 McGraw-Hill Ryerson Ltd. Financial Planning with Annuities Advantages good post retirement income, especially if interest rates are high defer taxes on proceeds predictable stream of income tailored to suit needs and preferences Guaranteed Annuities; payments continue after death to your beneficiaries Disadvantages no flexibility, cannot change income amount for inflation, major purchases or to reinvest 9-28

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 7 Define health insurance and explain its importance in financial planning. 9-29

 2004 McGraw-Hill Ryerson Ltd. Health Insurance & Financial Planning Most basic medical procedures are provided under provincial government health care plans Canadians need additional coverage for; semi private/private hospital rooms prescription drugs vision and dental care Health care costs outside of Canada can be very high and may not be covered by provincial plans 9-30

 2004 McGraw-Hill Ryerson Ltd. Supplemental Health Insurance Group Health Insurance 60% of all health insurance is sold as group plans employer sponsored, employee may pay part of cost covers you and immediate family seldom requires medical Individual Health Insurance covers one person or family can be tailored to your particular needs 9-31

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 8 Recognize the need for disability income insurance. 9-32

 2004 McGraw-Hill Ryerson Ltd. Disability Income Insurance Protects your most valuable asset - your ability to earn an income provides payments to replace income when an insured person is unable to work (due to accident or illness) Disability defined; inability to do your regular work unable to do any job 9-33

 2004 McGraw-Hill Ryerson Ltd. Disability Insurance Trade-offs Waiting or Elimination Period the longer the waiting period the lower the premium Duration of Benefits Amount of Benefits Accident and Sickness Coverage Guaranteed Renewability 9-34

 2004 McGraw-Hill Ryerson Ltd. Sources of Disability Income Employer Private Public Employment Insurance Canada /Quebec Pension Plans Worker’s Compensation Short term or Long Term Welfare 9-35

 2004 McGraw-Hill Ryerson Ltd. Determining Your Needs Disability Income Requirements determine benefits from public/private sources determine short fall based on 70-80% of your after-tax income consider waiting period and benefit period Critical Illness Insurance Provides money for care if you are diagnosed with a serious illness or condition Pays while you are alive 9-36

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 9 Understand the value of supplemental health and disability insurance. 9-37

 2004 McGraw-Hill Ryerson Ltd. Supplemental Health Insurance After considering health and disability coverage available from government, employer or other policies you may decide to seek further coverage Dental Expenses Reimbursement of dental services & supplies Encourages preventative dental care Vision Care Insurance Long term care insurance Provides day-in, day-out care for long term illness or disability 9-38

 2004 McGraw-Hill Ryerson Ltd. Major Provisions in a Health Insurance Policy Eligibility age, marital status & dependency requirements Assigned Benefits Internal Limits Co-Payment the amount the patient pays after deductible Benefits limits Exclusions & Limitations Co-ordination of Benefits Guaranteed Renewable Cancellation and Termination 9-39

 2004 McGraw-Hill Ryerson Ltd. Health Insurance Trade-offs Reimbursement vs. Indemnity reimbursement policy provides benefits based on actual expenses your incur indemnity policy provides specified benefits Internal Limits vs. Aggregate Limits internal limits specifies maximum benefits for specific expenses aggregate policies limit total amount of coverage Deductible and Co-Insurance affects cost of policy Out-of-Pocket Limit 9-40