insuring your life

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Insuring Your Life#8

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Concept of Risk

Risk Assumption: choice to accept and bear the risk of loss yourself

Example: Bear the cost of replacing stolen textbook

Risk Avoidance: avoiding an act that would create risk

Example: not driving to avoid a car accident

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Loss Prevention and Control

Prevention - reduce chance that loss will occur

Example: Driving the speed limit may reduce likelihood of a car accident

Control - reduce severity of loss once it occurs

Example: Wearing a seat belt can reduce effects of a car accident

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Insurance

Insurance Policy --transferring your risk of loss to the insurance company

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

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Benefits of Life Insurance

Financial protection for dependents

Protection from creditors

Tax benefits

Vehicle for savings

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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

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How Much Life Insurance is Right for You?

Multiple-of-Earnings Method

• Multiply annual earnings by an arbitrary number

Needs Analysis Method

• Estimate needs and examine available resources

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How Much Life Insurance Do You Need?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Assess Family’s Total Economic Needs

Income to maintain lifestyle

Extra expenses if income producer dies

Special needs of dependents

Debt liquidation

Liquidity

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

This is the amount of life insurance needed to provide your family with desired standard of living

Subtract Resources From Needs

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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

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Types of Term Insurance

Straight termCoverage remains the same while premiums can increase

Decreasing term Premiums remain the same while coverage decreases

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Important Features In Term Insurance

RenewabilityRenew policy without evidence of insurability

Convertibility Convert to whole life policy without evidence of insurability

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Advantages• 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

Term Insurance

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Whole Life Insurance

Cash value Provides death

protection plus a savings feature

Nonforfeiture right

Right to cash value when canceled prior to death

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

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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Whole Life Policies

Continuous premium (straight life) -- Level premiums paid until death or policy cancellation

Limited payment --Level premiums paid for specified number of years, insurance in force until death

Single premium --Lifetime coverage purchased with a single premium

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Advantages of Whole Life

Savings vehicle

Borrow against cash value

Premiums remain constant

Cash value accumulates tax-free until redeemed

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Disadvantages of Whole Life

Less death protection for young people

Low return on savings

Tax penalties possible on early withdrawal

Outstanding loan subtracted from face value of policy upon death

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Representative Universal Life Insurance Annual Outlays: $100,000 Policy, Preferred Nonsmoker Rates

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Buying Life Insurance

Compare costs and features

Select a large, highly rated, financially secure company

Choose a reputable agent

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Major Advantages and Disadvantages-Life Insurances

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Life Insurance Contract Features

Beneficiary clauseSettlement optionsPolicy loansPremium paymentsGrace periodNonforfeiture optionsPolicy reinstatementChange of policy

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Other Policy Features

Multiple indemnityDisability clauseGuaranteed purchase optionsSuicide clauseExclusionsParticipationLiving benefitsViatical Settlement