Chapter 16 Life Insurance

A GENDA Premature Death Types of Life Insurance Term Life Insurance and Its Types Whole Life Insurance and Its Types

P REMATURE D EATH Premature death can be defined as the death of a family head with outstanding unfulfilled financial obligation. Can cause serious financial problems for the surviving family members. The deceased’s future earnings are lost forever.

 Some families will experience a reduction in their standard of living.  Noneconomic costs are incurred, e.g., grief.  Additional expenses are incurred, e.g., funeral expenses and estate settlement costs.

T HREE P ARTIES OF L IFE I NSURANCE C ONTRACT Insured Beneficiary Owner

 One person may be both insured and owner, or owner and beneficiary but a person cannot be both insured and beneficiary. Example: You buy life insurance for yourself(both owner and insured are one person). You buy a life insurance for your husband/wife (both owner and beneficiary are one person). If you are insured and anything happens to you, you can not be the beneficiary of your own life insurance ( beneficiary and insured can no be the same person).

T YPES OF L IFE I NSURANCE Life insurance policies can be classified in two general categories: Term life insurance provide temporary protection. Whole life insurance or Cash-value life insurance has a savings component and builds cash values. There are many variations of both types available today.

T ERM L IFE I NSURANCE Under a term insurance policy, protection is temporary; protection expires at the end of the policy period, unless renewed. Most term policies are renewable for additional periods Premiums increase at each renewal To minimize adverse selection, many insurers have an age limitation beyond which renewal is not allowed

T ERM L IFE I NSURANCE Most term policies are convertible, which means the policy can be exchanged for a cash-value policy without evidence of insurability.

T YPES OF T ERM L IFE I NSURANCE Yearly-renewable term insurance is issued for a one-year period Term insurance can also be issued for 5 or more years A term to age 65 policy provides protection to age 65, at which time the policy expires

U SES AND L IMITATIONS OF T ERM L IFE I NSURANCE  Advantages of term life insurance Term life insurance is appropriate when: The amount of income that can be spent on life insurance is limited. The need for protection is temporary. The insured wants to guarantee future insurability. Disadvantages of term life insurance Term insurance premiums increase with age at an increasing rate and eventually reach prohibitive levels at age 65 or 70. Term insurance is inappropriate if you wish to save money for a specific need

A QUESTION Term life insurance does not provide the cash value or savings. What does it mean? Term life insurance like auto insurance does not provide the cash value. It means that if the death happens the insurer protects the family of insured and pays the death benefit. HOWEVER, If the death does not happen,the insurer does not pay back any thing to the insured who survives.

E XHIBIT 11.2 E XAMPLES OF T ERM L IFE I NSURANCE P REMIUMS

Which of the following $250,000 yearly renewable term (YRT) life policies would require the LOWEST premium? a.YRT purchased by a man age 45. b.YRT purchased by a woman age 30. c. YRT purchased by a man age 35. d. YRT purchased by a woman age 60. Answer: b

W HOLE L IFE INSURANCE OR CASH - VALUE POLICY Whole life insurance is a lifetime protection(not temporary) and provides the coverage until age100. The most important difference with term life insurance is that whole life insurance provides the cash value or savings, regardless of when the death occurs. It means that the insurer has obligation to pay back regardless of the death occurrence.

T YPES OF W HOLE L IFE I NSURANCE Ordinary lifeUniversal life Limited-payment lifeVariable universal life Endowment insuranceCurrent assumption whole life Variable lifeIndeterminate-premium whole life

L IMITED - PAYMENT LIFE INSURANCE Under a limited-payment life insurance policy, the insured has lifetime protection, and premiums are fix payments, but they are paid only for a certain period. The most common limited-payment policies are for 10, 20, 25, or 30 years. A paid-up policy at age 65 or 70 is another form of limited-payment life insurance.

W HICH ONE IS MORE EXPENSIVE ? T ERM LIFE INSURANCE OR W HOLE L IFE I NSURANCE ? Whole life insurance is more expensive than term life insurance because the protection runs for the lifetime period.