1. Chapter 9: Managing Life, Health, and Disability Risks Chapter 9 Managing Life, Health, and Disability Risks

2.  2005 Kaplan Financial 2 Chapter 9: Managing Life, Health, and Disability Risks Identifying Risks Associated with Premature Death Inadequate financial resources Estate preservation

3.  2005 Kaplan Financial 3 Chapter 9: Managing Life, Health, and Disability Risks Inadequate Financial Resources Income for the readjustment period Financial support of dependents Funds for specific goals

4.  2005 Kaplan Financial 4 Chapter 9: Managing Life, Health, and Disability Risks Estate Preservation Medical expenses prior to death Disposal and ceremonial expenses Probate expenses

5.  2005 Kaplan Financial 5 Chapter 9: Managing Life, Health, and Disability Risks Measuring Needs Related to Premature Death Human Life Value Approach Financial Needs Approach Capital Retention Approach

6.  2005 Kaplan Financial 6 Chapter 9: Managing Life, Health, and Disability Risks Human Life Value Approach 1.Calculate the family’s share of earnings (FSE). 2.Determine Work Life Expectancy. 3.Determine present value of worker’s stream of expected earnings.

7.  2005 Kaplan Financial 7 Chapter 9: Managing Life, Health, and Disability Risks Financial Needs Approach Lump-sum (cash) needs Final expenses and debts Mortgage liquidation or payment fund Education expenses Emergency expenses Income (cash flow) needs Readjustment period Dependency period Spousal life income (pre- and postretirement)

8.  2005 Kaplan Financial 8 Chapter 9: Managing Life, Health, and Disability Risks Capital Retention Approach 1.Prepare a personal balance sheet. 2.Calculate the capital available for income. 3.Determine the amount of additional capital required.

9.  2005 Kaplan Financial 9 Chapter 9: Managing Life, Health, and Disability Risks Individual Life Insurance Policies Term insurance Whole life insurance Universal life insurance

10.  2005 Kaplan Financial 10 Chapter 9: Managing Life, Health, and Disability Risks Term Insurance (1 of 3) Affordable Maximum Coverage/$ of premium Fulfills temporary need Ensures insurability Cost Prohibitive at Older Ages No Savings Feature

11.  2005 Kaplan Financial 11 Chapter 9: Managing Life, Health, and Disability Risks Term Insurance (2 of 3) Types Annual Renewable Term (ART) Level Premium Term to age 65 or 70 Decreasing/Increasing Reentry

12.  2005 Kaplan Financial 12 Chapter 9: Managing Life, Health, and Disability Risks Term Insurance (3 of 3) Riders Waiver of Premium Accidental Death Benefit Accelerated Death Benefit Return of Premium Spouse Insurance Child Insurance

13.  2005 Kaplan Financial 13 Chapter 9: Managing Life, Health, and Disability Risks Whole Life Insurance Permanent protection Cash value build-up Level premium (in general) Mortality charges Administrative costs and insurer profit

14.  2005 Kaplan Financial 14 Chapter 9: Managing Life, Health, and Disability Risks Whole Life Insurance (cont.) Types Ordinary Life/Continuous Premium Limited-Pay Policy Modified Life Single Premium/MEC Current Assumption (Interest-Sensitive) Variable Life Joint Life

15.  2005 Kaplan Financial 15 Chapter 9: Managing Life, Health, and Disability Risks Dividend Options Cash Paid-Up Additions Accumulate at Interest Reduce Premium One-Year Term Insurance (5 th Dividend Option)

16.  2005 Kaplan Financial 16 Chapter 9: Managing Life, Health, and Disability Risks Nonforfeiture Options Cash Surrender Value Reduced Paid-Up Insurance Extended Term Insurance

17.  2005 Kaplan Financial 17 Chapter 9: Managing Life, Health, and Disability Risks Whole Life Riders Waiver of Premium Accidental Death Benefit Spouse and Children’s Riders Term Insurance Living Benefits Option to Purchase Paid-Up Additions Unemployment Rider

18.  2005 Kaplan Financial 18 Chapter 9: Managing Life, Health, and Disability Risks Universal Life Insurance Premium Flexibility Ability to Change Death Benefit Amount Current Assumptions Fewer Guarantees

19.  2005 Kaplan Financial 19 Chapter 9: Managing Life, Health, and Disability Risks Structure of a Universal Life Policy

20.  2005 Kaplan Financial 20 Chapter 9: Managing Life, Health, and Disability Risks Universal Life Death Benefit Options Option A (Option 1) Level Death Benefit Net Amount at Risk equals Death Benefit less Cash Value Option B (Option 2) Increasing Death Benefit Net Amount at Risk Remains Level Throughout the Policy

21.  2005 Kaplan Financial 21 Chapter 9: Managing Life, Health, and Disability Risks Variable Universal Life Combines investment direction of variable life, and the premium death benefit and cash value flexibility of universal life Policyowner directs investment and bears investment risk Cash value maintained in one or more separate accounts Must be approved by SEC Agents/brokers who sell VUL must have license for insurance and securities

22.  2005 Kaplan Financial 22 Chapter 9: Managing Life, Health, and Disability Risks Modified Endowment Contracts (MECs) “7-pay” Test Material Change LIFO Treatment 10% Penalty (< age 59½)

23.  2005 Kaplan Financial 23 Chapter 9: Managing Life, Health, and Disability Risks Universal Life Riders and Optional Benefits Waiver of Premium Accidental Death Benefit Other Insured Living Benefits

24.  2005 Kaplan Financial 24 Chapter 9: Managing Life, Health, and Disability Risks Group Life Insurance Group term Group whole life insurance Group universal life

25.  2005 Kaplan Financial 25 Chapter 9: Managing Life, Health, and Disability Risks Policy Replacement Belth price of protection model: CPT = (P + CV 0 )(1 + i) – (CV 1 + D) (DB – CV 1 ) (0.001)

26.  2005 Kaplan Financial 26 Chapter 9: Managing Life, Health, and Disability Risks Life Insurance Policy Provisions Grace Period Incontestability Entire Contract Clause Misstatement of Age or Gender Assignment Absolute Collateral Suicide

27.  2005 Kaplan Financial 27 Chapter 9: Managing Life, Health, and Disability Risks Life Insurance Policy Provisions (cont.) Reinstatement Policy Loans Beneficiary Designations Revocable and Irrevocable Primary and Contingent Survivorship Clause War Exclusion Simultaneous Death

28.  2005 Kaplan Financial 28 Chapter 9: Managing Life, Health, and Disability Risks Life Insurance Settlement Options Interest Only Fixed Amount Fixed Period Life Income Life Income and Period Certain Life Income with Refund Joint and Survivor Income

29.  2005 Kaplan Financial 29 Chapter 9: Managing Life, Health, and Disability Risks Life Annuity Contracts What is an annuity? Types of annuities Immediate/Deferred Flexible/Single Premium Fixed/Variable Timing of annuity payments Straight Life Life with Period Certain Installment Refund Joint & Survivor

30.  2005 Kaplan Financial 30 Chapter 9: Managing Life, Health, and Disability Risks Taxation of Life Insurance Dividends as return of principal Withdrawals LIFO – MEC/1 st 15 years FIFO – After 15 years Death benefit excluded from beneficiary’s gross income Proceeds lose tax-free status if transfer is not a gift, transfer to insured, or transfer to insured’s business Premiums are not tax deductible except to employer for group life

31.  2005 Kaplan Financial 31 Chapter 9: Managing Life, Health, and Disability Risks Taxation of Viatical Agreements and Annuities Viatical Agreements Tax free to insured Proceeds taxable to purchaser Annuities Inclusion/Exclusion ratio 100% taxable if exceed original life expectancy

32.  2005 Kaplan Financial 32 Chapter 9: Managing Life, Health, and Disability Risks Individual Health Insurance Purpose Cost concerns Eligibility Medical expense insurance Major medical insurance

33.  2005 Kaplan Financial 33 Chapter 9: Managing Life, Health, and Disability Risks Long-Term Care Insurance Types of Care Skilled Nursing Care Custodial Care Home Health Care Assisted Living Adult Day Care Hospice Care

34.  2005 Kaplan Financial 34 Chapter 9: Managing Life, Health, and Disability Risks Long-Term Care Insurance (cont.) Eligibility Chronically Ill 2 of 6 ADLs Substantial Cognitive Impairment Tax deductible premiums and tax-free benefits

35.  2005 Kaplan Financial 35 Chapter 9: Managing Life, Health, and Disability Risks Disability Income Insurance Definition of disability Any occupation Own occupation Split definition Social Security Characteristics Benefit period Elimination period Partial disability Waiver of premium Cost of living rider Future increase option Automatic increase rider

36.  2005 Kaplan Financial 36 Chapter 9: Managing Life, Health, and Disability Risks Disability Income Insurance (cont.) Taxation of benefits Tax free if insured pays premium Taxable if employer pays premium Integration with Social Security Termination of beneifts Residual benefits

37.  2005 Kaplan Financial 37 Chapter 9: Managing Life, Health, and Disability Risks Group Health Insurance Eligibility Characteristics

38.  2005 Kaplan Financial 38 Chapter 9: Managing Life, Health, and Disability Risks Group Health Insurance (cont.) Basic and major medical Dental and vision Disability income Managed care Coordination of benefits

39.  2005 Kaplan Financial 39 Chapter 9: Managing Life, Health, and Disability Risks Group Health Insurance (cont.) Termination of benefits COBRA Coverage for elderly employees Coverage for retirees Taxation of group health benefits HIPAA