1. Lecture Twelve： Fundamentals and Types of Life Insurance

2. Learning Objective
Explain the different health risks in a person’s life.
Describe the financial impact of premature death on different types of family.
Describe the economic justification of life insurance.
Methods for providing life insurance protection.
Explain the types of life insurance.
Explain the major characteristics of different types of life insurance.

3. Main Contents
The financial impact of premature death on different types of family
Three approaches to estimate the amount of life insurance to own
Methods for providing life insurance protection
Types of life insurance
The major characteristics of term insurance
The major features of ordinary life insurance
The basic characteristics of variable life insurance
The basic characteristics of universal life insurance

4. Risks in a person’s life
Thinking about the following questions
What risks does a man or woman face in his or her life?
What’s the financial impact of premature death on different types of family

5. Risks in a person’s life
In people’s life, however, there are different kinds of health risk. Such as:
Illness
premature death
injury

6. Case
Kelly, age 32, is the sole support for her disabled husband and two small children. She earns $30,000 annually and has $40,000 of life insurance and $10,000 in savings. If Kelly dies suddenly, could her family survive on the $50,000 left to them?
Probably not. Although Social Security survivor benefits may be available, other financial factors must be considered, such as payment of the mortgage, the children-college education, and financial support for her disabled husband. Clearly, $50,000 will not go far.
Kelly premature death will create financial insecurity for the surviving family members. She can, however, purchase life insurance to restore the family share of her lost earnings.

7. Probability of Death Prior to Age 65
Within a year
Prior to age 65
0.0100
0.21 35
0.0017
0.18 5
0.0003
0.20 40
0.0022
0.17 10
0.0002 45
0.0032
0.16 15
0.0006 50
0.0050
0.14 20
0.0011
0.19 55
0.0081
0.12 25
0.0012 60
0.0126
0.07 30
0.0014

8. Premature Death Meaning of premature death
Premature death can be defined as the death of a family head with outstanding unfulfilled financial obligations, such as dependents to support, children to educate, and a mortgage to pay off.
Costs of Premature Death
premature mature death can cause serious financial problems for the surviving family members.
Family earning lost
additional expenses (such as funeral expenses, medical bills, estate settlement costs, and federal estate taxes for large estates )
reduction in living standard
certain noneconomic costs ( such as emotional grief, loss of a parental role, etc.)

9. Premature Death
Financial Impact of Premature Death on Different Types of Families:
Single people
Single-parent families
Two-income earners
Traditional families
Sandwiched families
Part F: General Provisions

10. Three approaches to estimate the amount of life insurance to own
Human life value approach
Needs approach
Capital retention approach

11. Three approaches to estimate the amount of life insurance to own
Human life value approach
Be defined as the present value of the family’s share of the deceased breadwinner’s future earnings.
It can be calculated by the following steps:

12. Three approaches to estimate the amount of life insurance to own
Estimate the individual’s average annual earnings over his or her productive lifetime.
Deduct federal and state income taxes, Social Security taxes, life and health insurance premiums, and the costs of self-maintenance. The remaining amount is used to support the family.

13. Three approaches to estimate the amount of life insurance to own
Determine the number of years from the person’s present age to the contemplated age of retirement.
Using a reasonable discount rate, determine the present value of the family’s share of earnings for the period determined in step 3.

14. Three approaches to estimate the amount of life insurance to own
Needs approach
The various family needs that must be met if the family head should die are analyzed, and the amount of money needed to meet these needs is determined.

15. Three approaches to estimate the amount of life insurance to own
The most important family needs are the following:
Estate clearance fund
Income during the readjustment period
Income during the dependency period
Life income to the surviving spouse
Special needs
Mortgage redemption fund
Educational fund
Emergency fund
Retirement needs

16. How Much Life Insurance Does An American Need?
An Illustration of the Needs Approach for estimating the amount of life insurance
Example (Exhibit p120)
cash needs
income needs
special needs

17. Three approaches to estimate the amount of life insurance to own
Capital retention approach
(Also called capital needs analysis) , it preserves the capital needed/income-producing assets to provide income to the family
The amount of life insurance needed based on the capital retention approach can be determined by the following steps:
Prepare a personal balance sheet listing all assets and liability
Determine the amount of income-producing capital
Determine the amount of additional capital needed (if any)

18. How Much Life Insurance Does An American Need?
An Illustration of the Capital Retention Approach for estimating the amount of life insurance
Example (p )
financial needs
current assets
additional life insurance

19. Methods for Providing Life Insurance Protection
Two basic methods can be used to provide life insurance to individuals:
Yearly Renewable Term Method
Level-Premium Method

20. Methods for Providing Life Insurance Protection
Yearly Renewable Term Method (YRT，年度续保的定期保险）
provides life insurance protection for only one year. The insured is permitted to renew the policy for successive one-year periods with no evidence of insurability.
The pure premium is determined by the death rate at each attained age.

21. Methods for Providing Life Insurance Protection
Premium increases as the individual gets older.
The premium increase is gradual during the early years, but it rises sharply during the later years.
Because premium increases with age, yearly renewable term insurance leads to Adverse Selection against the insurer.
Life-time protection cannot be provided to most insureds under the yearly renewable term methods;

22. Methods for Providing Life Insurance Protection
Level-Premium Method (均衡保费保险）
premiums do not increase from year to year but remain level throughout the premium paying period, and the insured has lifetime protection to age 100.
premiums paid during the early years of the policy are higher than is necessary to pay current death claims, while those paid in the later years are inadequate for paying death claims.

23. Methods for Providing Life Insurance Protection
the excess premiums paid during the early years are invested at compound interest, and the accumulated funds are used to supplement the inadequate premiums paid during the later years of the policy.
The method of investing and accumulating the fund is regulated by law, it is referred to as a Legal Reserve.

26. Methods for Providing Life Insurance Protection
the net amount at risk represents the pure insurance portion of the policy. It declines over time as the legal reserve increases.
The death claim consists of two elements:
A legal reserve (saving element)
The net amount at risk (protection element)
As the legal reserve increases, the net amount at risk declines.
by the level-premium method, the insurer can provide the insured with lifetime protection.

27. Methods for Providing Life Insurance Protection
Cash Values VS Legal Reserve
Under the level-premium method, a legal reserve results.
The policy-owner may no longer want the insurance, and the policy can be surrendered for its cash surrender value.
Cash values and the legal reserve are not the same thing and are computed separately. The cash values are below the legal reserve for several years, but after the policy has been in force over an extended period, the cash surrender value will equal the full reserve.

28. Relationship between the net amount at risk and legal reserve

29. Types of Life Insurance
From a generic viewpoint, life insurance policies can be classified as either term insurance or cash-value life insurance. Term insurance provides temporary protection, while cash-value life insurance has a savings component and builds cash values. Numerous variations and combinations of these two types of life insurance are available today.

30. Types of Life Insurance
Term Insurance (定期寿险）
Whole Life Insurance（终身寿险）
Endowment Insurance(两全保险）
Variation of Whole Life Insurance
Other Types of Life Insurance

31. Types of Life Insurance
Term Insurance (定期寿险）
Provides temporary protection, such as 1, 5, 10, or 20years. The protection expires at the end of the period.
Most policy are renewable without evidence of insurability （可保性）.
The premium is increased at each renewal and is based on the insured’s attained age.
The renewal provision results in adverse selection against the insurer.

32. Types of Life Insurance
Term Insurance(定期寿险）
Has no cash-value or savings element
Can be exchanged for a cash-value policy
Types of Term Insurance
Yearly renewable term
5-, 10-, or 20-year term
Term to age 65
Decreasing term (the face amount gradually declines each year, but the premium is level throughout the period)
Reentry term (renewable premiums are based on select (lower) mortality rates if the insured can periodically demonstrate the evidence of insurability)

33. Types of Life Insurance
Term Insurance(定期寿险）
Users of term insurance
Relatively lower premium, especially at younger ages. More selection under the keen price competition.
appropriate if the need for protection is temporary.
can be used to guarantee future insurability
Limitations of Term Insurance
premiums increase with age and eventually reach prohibitive levels. (e.g. Exhibit 17.1 P135) Not suitable for people beyond 65.
inappropriate if you wish to save money for a specific need.

34. Types of Life Insurance
Whole Life Insurance（终身寿险）
is a cash-value policy that provides lifetime protection.
From a historical or traditional perspective, the following two types merit some discussion:
Ordinary life insurance（普通终身寿险）
Limited-payment life insurance （限期缴费终身寿险）

35. Types of Life Insurance
Ordinary life insurance（普通终身寿险）
（Also called straight life and continuous premium whole life)， provides lifetime protection to age 100, and the death claim is a certainty.
premiums remain level throughout the premium paying period.
Has an investment or saving element called cash surrender value(现金价值，退保金）
cash value can be borrowed under a loan provision. The cash values are small during the early years, but increase over time.
Contains cash surrender value, nonforfeiture options, dividend options, and settlement options.

36. Types of Life Insurance
Uses of Ordinary life insurance
Ordinary life insurance is appropriate in two general situations:
be appropriate when lifetime protection is needed
be used to save money when additional savings are desired
Limitation of ordinary life insurance
-some persons are still underinsured after the policy is purchased due to the insurance agent’s persuasion.

37. Types of Life Insurance
Limited-payment life insurance （限期缴费终身寿险）
provides lifetime protection
premiums remain level ,but paid only for a certain period （20,20, 25, 30 years). An extreme is single-premium whole life insurance.
The premiums under is higher than under an ordinary life policy.
Should be used with caution, especially for a person with a modest income to insure his or her life.

39. Types of Life Insurance
Endowment Insurance (两全保险）
Another traditional form of life insurance.
pays the face amount of insurance if the insured dies within a specified period; if the insured survives to the end of the endowment period, the face amount is paid to the policyowner at that time.

40. Types of Life Insurance
Variation of Whole Life Insurance （现代终身寿险）
Life insurance have experienced keen competition in recent years from commercial banks, mutual funds, and other financial institutions.
Traditional whole life insurance have been criticized by the consumers due to relatively lower return on savings component.
To become more competitive, insurers have developed a wide variety of whole life products that combine insurance protection with an investment element.

41. Types of Life Insurance
Variation of Whole Life Insurance （现代终身寿险）
Some important variations of whole life insurance include the following:
Variable life insurance(变额寿险）
Universal life insurance(万能寿险）
Variable Universal Life Insurance(变额万能寿险）

42. Types of Life Insurance
Variable life insurance(变额寿险）
Appeared in US market in 1976.
be defined as a fixed-premium policy in which the death benefit and cash surrender values vary according to the investment experience of a separate account maintain by the insurer.
Although there are different policy designs, variable life policies have certain common features as the following:

43. Types of Life Insurance
Variable life insurance(变额寿险）
A permanent whole life contract with a fixed premium.
the entire reserve is held in a separate account and is invested in equities or other investments.
The policyhowner has the option of investing the cash values in a variety ways, such as common stock fund, bond fund, balanced fund, money market fund, or international fund.
cash surrender values are not guaranteed, and there are no minimum guaranteed cash values.

44. Types of Life Insurance
Universal life insurance(万能寿险）
Appeared in US market in 1979.
be defined as a flexible premium policy that provides protection under a contract that unbundles (分类）the protection and saving components.
The policyowner determines the amount and frequency of the premium payments, which can be monthly, quarterly, semiannually, annually, or a single payment.
The premium less a monthly mortality charges, administrative expense charge, and credited to a cash-value account .
Universal life insurance has certain characteristics as the following:

45. Types of Life Insurance
Universal life insurance has certain characteristics as the following:
Unbundling of component parts （protection component, saving component, expense component)
mortality charge; Expense charges; Interest rate
Two forms of universal life insurance (Death Benefit =pure insurance protection + cash value. Option A pays a level death benefit during the early policy years.; Option B provides for an increasing death benefit)
Considerable flexibility
Cash withdrawals permitted
Favorable income-tax treatment

47. Types of Life Insurance
Limitation of Universal Life Insurance
Misleading rates of return
Incomplete disclosure
Decline in interest rates
Right to increase mortality charge
Lack of firm commitment to pay premiums.

48. Types of Life Insurance
Variable Universal Life Insurance(变额万能寿险）
This policy is similar to the universal life policy but with two major exceptions:
The policyowner has a variety of investment options for investment of the cash values.
There is no minimum guaranteed rate of interest.
The investment risk falls entirely on the policyowner.

49. Types of Life Insurance
Variable Universal Life Insurance(变额万能寿险）
Current Assumption Whole Life Insurance
Current assumption whole life insurance (also called interest-sensitive whole life) is a nonparticipating whole life policy in which the cash values are based on the insurer’s current mortality, investment, and expense experience.
Indeterminate-Premium Whole Life Insurance
An indeterminate-premium whole life policy is a generic name for a nonparticipating policy that permits the insurer to adjust premiums based on anticipated future experience.

50. Types of Life Insurance
Other Types of Life Insurance
A wide variety of additional life insurance products are sold in US today. Some policies are designed to meet special needs or have unique features. Others combine term insurance and cash-value life insurance to meet these needs.
Modified Life Insurance
Preferred Risks
Second-to-Die Life Insurance
Juvenile Insurance
Savings Bank Life Insurance
Industrial Life Insurance

51. Summary
In people’s life there are different kinds of health risk, such as illness, premature death, injury, etc.
Premature death means that a family head dies with outstanding unfulfilled financial obligations. Great financial insecurity may result if a family head dies prematurely.
At least four costs are list with premature death: human life value, additional expenses, noneconomic costs.
The purpose of life insurance can be economically justified if a person has an earning capacity.

52. Summary
From a generic viewpoint, life insurance policies can be classified as term insurance or cash-value life insurance.
Term insurance provides temporary protection, while cash-value life insurance has a savings component and builds cash values. The purpose of life insurance can be economically justified if a person has an earning capacity.

53. Review Questions
I. Explain the meaning of premature death and identify the costs associated with it.
2. Explain the economic justification for the purchase of life insurance.
3. Define the human life value. How is the human life value measured?
4. Describe the needs approach for determining the amount of life insurance to own.
5. Explain the yearly renewable term method for providing life insurance to individuals.
7. Explain the level-premium method for providing life insurance to individuals.
9. Describe the purpose of the legal reserve in cash value life insurance.
10. Describe the basic characteristics of term insurance.
11. When is the use of term insurance appropriate?
12. Describe the basic characteristics of ordinary life insurance
13. Under what situations can an ordinary life policy be used?
14.Describe the basic features of a variable life insurance policy.
15. Explain the major characteristics of universal life insurance.

54. Case application
1. a. "The financial impact of premature death is uniform for all families." Do you agree or disagree with this statement? Explain your answer.
b. Do single people need life insurance? Explain your answer.
2. Jose, age 30, is married and has one child. He has been told that he should purchase life insurance to protect his family.
a. Describe each of the basic family needs for which Jose may need life insurance.
b. Explain the limitations of the needs approach as method for determining the amount of life insurance to own.

55. Search For Information
资料查询：
查阅自己感兴趣的我国保险市场上任一家人寿保险公司的寿险产品。
现实问题思考：
从转嫁人身风险的角度分析我国寿险保险产品市场的优劣势。

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