1. Insuring Your Life #8

2. Learning Goals
Explain the concept if risk and the basics of insurance underwriting
Discuss the primary reasons for life insurance and identify those who need coverage
Calculate how much life insurance you need
Distinguish among the various types of life insurance policies and describe their advantages and disadvantages
Choose the best life insurance policy for your needs at the lowest cost
Become familiar with the key features of life insurance policies

3. Basic Insurance Concepts
Basic purpose of insurance
Protect you and your dependents from the financial consequences of losing assets or income when an accident, illness, or death occurs

4. The Concept of Risk
Risk: chance of economic loss
There’s a risk anytime you have a financial interest in something
Life
Health
Home
Car
Business

5. The Concept of Risk
Risk Avoidance: avoiding an act that would create risk
Example: not driving to avoid a car accident
Costs: inconvenience
Risk Assumption: choice to accept and bear the risk of loss yourself
Example: Bear the cost of replacing stolen textbook

6. Loss Prevention and Control
Prevention - reduce chance that loss will occur
Example: Driving the speed limit may reduce likelihood of a car accident; living a healthy lifestyle
Control - reduce severity of loss once it occurs
Example: Wearing a seat belt can reduce effects of a car accident

7. Insurance
Insurance Policy --transferring your risk of loss to the insurance company
Use actuarial data to estimate the risk – frequency and magnitude – of loss for the population

8. Underwriting Basics
Insurance company decides whom to insure and rate to be charged
Company must guard against adverse selection – a disproportionate number of bad risks

9. Benefits of Life Insurance
**Financial protection for dependents
Protection from creditors
Tax benefits
Vehicle for savings

10. Do You Need Life Insurance?
Consider if
Dependents count on your financial support
You have debts
home mortgage
Maybe Not if
No one depends on your support
You are a child

11. How Much Life Insurance is Right for You?
Multiple-of-Earnings Method
Multiply annual earnings by an arbitrary number
(usually 5-10x)
Needs Analysis Method
Estimate needs and examine available resources
More detailed

12. How Much Life Insurance Do You Need?

13. Assess Family’s Total Economic Needs
Income to maintain lifestyle
Extra expenses if income producer dies
Special needs of dependents
Debt liquidation
Liquidity

14. Determine Financial Resources
Savings and investments
Social Security benefits
Pension or retirement plans
Other life insurance
Income of surviving spouse or children
Real estate or other assets

15. Subtract Resources From Needs
Needs – resources =This is the amount of life insurance needed to provide your family with desired standard of living
Life insurance needs are not static (fixed), review and adjust every 5 years or after major family changes.

16. Term Life Insurance
Specified amount of insurance protection for a set period
Benefit paid if insured dies during that time
Simplest type of insurance policy

17. Major kinds of policies
Term Life
Whole Life
Universal Life
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18. Term Life Provides a specified amount of protection for a set period.
Simplest form of insurance
Most common types:
Straight term
Decreasing term
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19. Types of Term Insurance
Straight term
Coverage remains the same while premiums can increase
Decreasing term
Premiums remain the same while coverage decreases

20. Important Features In Term Insurance
Renewability
Renew policy without evidence of insurability
Convertibility
Convert to whole life policy without evidence of insurability

21. Representative Annual Renewable Term Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates

22. Representative Annual Renewable Term Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates

23. Term Insurance Advantages Disadvantages
Economical way for young families to purchase large amounts of life insurance
Provides for needs that disappear over time
Disadvantages
Premiums become more costly as you get older
Does not build cash value
Limited time period; temporary coverage

24. Whole Life Provides permanent insurance coverage during an entire life
Has a savings feature (cash value)
Can cancel policy and get nonforfeiture right.
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25. Whole Life Insurance Cash value Nonforfeiture right
Provides death protection plus a savings feature
Nonforfeiture right
Right to cash value when canceled prior to death

26. How Cash Value Accumulates In A $200,000 Whole Life Policy

27. Representative Whole Life Insurance Premiums: $100,000 Policy, Preferred Nonsmoker Rates

28. Types of Whole Life Policies
Continuous premium (straight life) -- Level premiums paid until death or policy cancellation; earlier in life purchased, lower the premium; offers greatest amount of death protection
Limited payment --Level premiums paid for specified number of years, insurance in force until death; preferred for those wanting lifelong death protection
Single premium --Lifetime coverage purchased with a single premium; tax sheltered investment

29. Advantages of Whole Life
**Savings vehicle
Borrow against cash value
Premiums remain constant
Cash value accumulates tax-free until redeemed

30. Disadvantages of Whole Life
Less death protection per $ for young people
Low return on savings
Tax penalties possible on early withdrawal
Outstanding loan subtracted from face value of policy upon death

31. Low Load Whole Life Insurance
To keep cost low can purchase this.
Sold directly to consumers from insurers; eliminating sales agents
Cash values grow quicker
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32. Universal Life Insurance
Permanent cash-value insurance that combines term insurance with tax sheltered savings account
Provides death protection plus savings feature
Premiums are “unbundled” into 2 accounts
Savings grow at current interest rate vs. guaranteed minimum rate
Provides flexibility in premiums paid and death benefit

33. Universal Advantages: Disadvantages: Flexibility Savings feature
Changing premiums and protection levels
Heavy fees
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34. Representative Universal Life Insurance Annual Outlays: $100,000 Policy, Preferred Nonsmoker Rates

35. Variable Life Insurance
Provides death protection plus a savings or cash value feature
Cash value can be invested in mutual funds for greater possible return
Returns not guaranteed and actual death benefit can vary
More of an investment vehicle
Risky, use caution

36. Representative Variable Life Insurance Values: $100,000 Policy, Preferred Nonsmoker, Male, Age 45

37. Other Types of Life Insurance
Variable life insurance
Combines flexibility of premium payment feature of universal with investment choices offered by variable
Group life insurance
Usually term insurance offered through employers
Premiums usually lower than individually purchased policies
Usually term insurance
1/3 of all in U.S. ; fastest growing

38. Other Special-Purpose Life Insurance
Credit and Mortgage life insurance
Decreasing term insurance
Pays off outstanding balance if borrower dies before repaid
Costly form of coverage
Industrial life insurance
Whole life policies with small face amounts
For low-income families

39. Buying Life Insurance Compare costs and features
Select a large, highly rated, financially secure company
Choose a reputable agent

40. Major Advantages and Disadvantages-Life Insurances

41. Life Insurance Contract Features
Beneficiary clause – primary & contingent
Settlement options – lump sum most often
Policy loans – advance against whole life policy
Premium payments
Grace period – usually 31 days if late
Nonforfeiture options – offer paid up or extended term
Policy reinstatement – revives original contract
Change of policy

42. Other Policy Features – 187-188
Multiple indemnity – multiples value if in accident
Disability clause – waiver of premium; disability income clause
Guaranteed purchase options
Suicide clause – voids policy within certain period
Exclusions – aviation, war, hazardous occupation
Participation – policy dividends
Living benefits – accelerated benefits; living benefit rider
Viatical Settlement – third party investor