Life Insurance: The Basics

What is the one guarantee in life? You buy health insurance in case you get sick You buy automobile insurance in case you have an accident You buy homeowners insurance in case your property gets damaged You don’t buy life insurance to plan for your death

Life Insurance: The Basics Life Insurance is to protect the people who depend on you and would suffer a financial loss when you die A beneficiary is the person or legal entity, such as a charity, designated to receive the death benefit The death benefit is the sum paid to the beneficiary by the insurance company

Life Insurance: The Basics Usually people buy life insurance to protect their children, a surviving spouse, a disabled relative, or elderly parents It ensures that the dependent family members will be able to afford and maintain their lifestyle or receive the care they had before the death

Life Insurance: The Basics Reasons to Buy Life Insurance To provide immediate cash to pay for a funeral, any other costs arising from the death, or pressing debtsTo provide immediate cash to pay for a funeral, any other costs arising from the death, or pressing debts To provide funds that are income tax-freeTo provide funds that are income tax-free To pay off a mortgage or other loansTo pay off a mortgage or other loans To provide housekeeping and child care services so that the surviving spouse can enter the workforceTo provide housekeeping and child care services so that the surviving spouse can enter the workforce To provide the surviving spouse sufficient funds to stay at home or reduce work hoursTo provide the surviving spouse sufficient funds to stay at home or reduce work hours To provide dependents with an emergency fundTo provide dependents with an emergency fund

How Life Insurance Works Legally binding contract between an insurance company (insurer) and an individual (insured) In exchange for payment of premiums, the insurer agrees to pay a specified death benefit The premiums collected from all policy holders are placed in an insurance pool The Insurance Company can invest the money in the pool but must have enough on hand to pay out a large number of claims

Life Insurance: The Basics Underwriting Life Insurance Underwriting is the process of assessing applicants to determine whether they are good risks An underwriter’s job is to minimize the risk the company takes Factors in underwriting: Present healthPresent health Medical historyMedical history Family medical historyFamily medical history LifestyleLifestyle OccupationOccupation

Life Insurance: The Basics Mortality Tables Sophisticated statistical averages of how long a person of a certain age, gender, ethnic background and so on can be expected to live Tables also consider your health, medical history, occupation Premium Class Insureds are placed into classes based on results from underwriting The better the class the lower the premiums

Life Insurance: The Basics How much life insurance should a person have? Factors: Number of dependentsNumber of dependents Ages and needs of dependentsAges and needs of dependents Balance on mortgage or monthly rent paymentsBalance on mortgage or monthly rent payments Balance of loansBalance of loans Health insuranceHealth insurance TuitionTuition Basic necessitiesBasic necessities

Life Insurance: Basic Policy Types Two Basic Types Term Insurance Permanent Insurance

Life Insurance: Basic Policy Types Term Insurance SimplestSimplest Usually most inexpensiveUsually most inexpensive A policy that is limited to a specific length of time, or termA policy that is limited to a specific length of time, or term Does not accumulate cash valueDoes not accumulate cash value Usually term is 1,5,10,15,20,25,or 30 yearsUsually term is 1,5,10,15,20,25,or 30 years

Life Insurance: Basic Policy Types Term Insurance Term Policy Options Renewability OptionRenewability Option After the term has expired you can choose to renew your policyAfter the term has expired you can choose to renew your policy Don’t have to prove insurabilityDon’t have to prove insurability Will pay a higher premiumWill pay a higher premium

Life Insurance: Basic Policy Types Permanent Life Insurance Covers the insured for a lifetime or until age 100 If you live to 100 insurer pays individual the death benefit Three types of Permanent Insurance: Whole lifeWhole life Universal lifeUniversal life Variable lifeVariable life

Life Insurance: Basic Policy Types Permanent Life Insurance Cash Value Cash reserves accumulate in the policyCash reserves accumulate in the policy You can take a loan out on the policyYou can take a loan out on the policy You can cash in your policyYou can cash in your policyDividends The proportion of a company’s profit that it pays to its policyholdersThe proportion of a company’s profit that it pays to its policyholders

Life Insurance: Basic Policy Types Permanent Life Insurance Whole Life Insurance Policyholder pays the same premium amount for a certain number of yearsPolicyholder pays the same premium amount for a certain number of years Annual premiums are initiallyhigher than term, but in the long run they may become less since they stay levelAnnual premiums are initially higher than term, but in the long run they may become less since they stay level If you plan on having insurance for more than 20 years it is usually more advantageous to have whole life insuranceIf you plan on having insurance for more than 20 years it is usually more advantageous to have whole life insurance

Life Insurance: Basic Policy Types Permanent Life Insurance Whole Life Insurance Advantages: Absolutely predictable with zero riskAbsolutely predictable with zero risk Return is guaranteedReturn is guaranteedDisadvantage: Relatively inflexibleRelatively inflexible

Life Insurance: Basic Policy Types Permanent Life Insurance Universal Life Functions like an investment accountFunctions like an investment account When a premium is paid funds are deposited into an account. Interest is credited to the account, usually monthly, and a deduction is made, called a mortality charge or term cost, to cover the cost of the insurance.When a premium is paid funds are deposited into an account. Interest is credited to the account, usually monthly, and a deduction is made, called a mortality charge or term cost, to cover the cost of the insurance. Takes advantage of high interest rates and yields higher returns on the cash valueTakes advantage of high interest rates and yields higher returns on the cash value You can adjust the premiums you pay and the death benefit amountYou can adjust the premiums you pay and the death benefit amount

Life Insurance: Basic Policy Types Permanent Life Insurance Universal Life Advantages: FlexibilityFlexibility You can increase the amount of money you put inYou can increase the amount of money you put inDisadvantages: Risks of investment market are transferred to the policyholderRisks of investment market are transferred to the policyholder You may end up having to pay more in premiums than expectedYou may end up having to pay more in premiums than expected

Annual Premiums per $1,000 of Life Insurance

Annual Premium for a Policy To find the annual premium for a policy, divide the face amount by $1,000 and then multiply the result by the cost per $1,000 in the table. Cost per $1,000× Face of Policy $1,000 Annual Premium=

Life Insurance Cash Values Cash value is the money that you get if you cancel the policy. If you cancel a term policy, you get nothing. Whole life policies build cash value after premiums have been paid for a few years. The cash values of universal life insurance policies will vary with the current value of the investments that have been made.

Whole Life Cash Values The policy may give you a choice of taking the cash, or using it to buy a small amount of whole life insurance that is totally paid up, or to buy term insurance. The policy may also allow you to borrow up to the total amount of the cash value, often at a lower interest rate than that offered by other lenders. If you don’t pay back the loan, it will be subtracted from the amount paid to your beneficiaries.