1. Copyright © 2008 Pearson Education Canada 5-1 Chapter 5 Life Insurance

2. Copyright © 2008 Pearson Education Canada 5-2 Purpose of Life Insurance Protect dependent’s income stream Provide liquidity for estate

3. Copyright © 2008 Pearson Education Canada 5-3 Life Insurance Proceeds Can Be Used to Provide education or income for children Pay off the mortgage or other debts Provide retirement income Make estate or tax payments Provide survivor benefits Establish endowment funds for children

4. Copyright © 2008 Pearson Education Canada 5-4

5. Copyright © 2008 Pearson Education Canada 5-5 Basic Concepts of Life Insurance

6. Copyright © 2008 Pearson Education Canada 5-6 Policy Agreement or contract Between Insured person and insurance company States which risks the life insurance company has agreed to assume

7. Copyright © 2008 Pearson Education Canada 5-7 Face Amount Amount of agreed payout At time of death

8. Copyright © 2008 Pearson Education Canada 5-8 Beneficiary Person named in the policy To receive the death benefit

9. Copyright © 2008 Pearson Education Canada 5-9 Premiums Regular payments by the insured To the insurance company

10. Copyright © 2008 Pearson Education Canada 5-10 Insurable Interest Relationship between Insured and event insured against Essential for all insurance Insure your own life Insure life of another person Spouse, child, grandchild, employee Or any person on whom insured may be wholly or partially dependent

11. Copyright © 2008 Pearson Education Canada 5-11 Three Basic Principles of Life Insurance 1. Pooling risk 2. The pure cost of insurance 3. The level premium

12. Copyright © 2008 Pearson Education Canada 5-12 1.Pooling Risk Pooling small contributions of many people Compensate a few experiencing a loss Based on mortality tables

13. Copyright © 2008 Pearson Education Canada 5-13 2.The Pure Cost of Life Insurance Follows mortality curve More expensive With age For males

14. Copyright © 2008 Pearson Education Canada 5-14 Mortality Rate Deaths per thousand of population Rises with age Higher for males General state of health Hazardous activities Scuba diving Hang gliding

15. Copyright © 2008 Pearson Education Canada 5-15

16. Copyright © 2008 Pearson Education Canada 5-16 Mortality Cost

17. Copyright © 2008 Pearson Education Canada 5-17 3.The Level Premium Constant premium over the life of the policy Causes overpayment at beginning of the policy And underpayment at end Gives rise to policy reserves

18. Copyright © 2008 Pearson Education Canada 5-18

19. Copyright © 2008 Pearson Education Canada 5-19 Policy Reserves Also called cash surrender value Overpayment of premium in early years Level premium > pure cost of insurance Refundable If policy cancelled If coverage reduced Not a saving feature!

20. Copyright © 2008 Pearson Education Canada 5-20 Factors Affecting Cost of Life Insurance Mortality rate Loading charges Administrative costs, commissions, dividends Frequency of premium payments Annual payments cheaper than monthly How premiums are calculated Participating policies Non-participating policies

21. Copyright © 2008 Pearson Education Canada 5-21 Participating Policies Premiums generally higher Policy-holder gets refund If premiums are too high Refund called a dividend Refund not taxable

22. Copyright © 2008 Pearson Education Canada 5-22 Refund, Dividend, Depends Upon Company’s efficiency Return on investment Amount paid in claims Policy cancellations

23. Copyright © 2008 Pearson Education Canada 5-23 Non-participating Policies Premiums cannot be increased No dividends

24. Copyright © 2008 Pearson Education Canada 5-24 Types of Life Insurance Term life Whole life Combination

25. Copyright © 2008 Pearson Education Canada 5-25 Term Life Insurance Term life insurance Decreasing term life insurance Group life insurance Credit life insurance

26. Copyright © 2008 Pearson Education Canada 5-26 Term Life Insurance Constant face value Constant premium during term Premium increases upon renewal No cash surrender value Most face value per dollar premium Specified risk Not 100% probability Definite time Not life

27. Copyright © 2008 Pearson Education Canada 5-27

28. Copyright © 2008 Pearson Education Canada 5-28 Decreasing Term Life Insurance Variation of term insurance Decreasing face value Falls to zero at end of term Constant premium Income protection for young families Maximum coverage when children young Reduced coverage when children older

29. Copyright © 2008 Pearson Education Canada 5-29 Decreasing Term Life Insurance May be used as mortgage insurance To pay off mortgage balance No legal obligation to pay off mortgage

30. Copyright © 2008 Pearson Education Canada 5-30

31. Copyright © 2008 Pearson Education Canada 5-31 Group Life Insurance A variation of term insurance Bought by employers Paid for by workers/employer Usually one-year renewable term Terminates with employment Possible option to convert to individual policy Premiums lower Especially for older employees