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Insuring Your Life#8

Basic Insurance Concepts

Basic purposes of insurance• Protect you and dependents from losing

your acquired assets• Shield you and your family from an

interruption in earnings

The Concept of Risk

Risk: chance of economic loss

Insurance planning: reduces risk that losses will cause financial devastation

The Concept of Risk

Risk Avoidance – Avoiding an act that would create a risk

Example: not driving to avoid car accident

Risk avoidance is not always practical or possible

Loss Prevention and Control

Prevention - reduce chance that loss will occur

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

Control - reduce severity of loss once it occurs

Example: Wearing a seat belt can minimize effects of an accident

The Concept of Risk

Insurance pay someone to bear your risk of loss

Example: Buy an insurance policy to transfer risk to insurance company

Assuming Risk choice to accept and bear the risk of loss yourself

Example: Bear the cost of replacing stolen calculator

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

Benefits of Life Insurance

• Financial protection for dependents• Protection from creditors• Tax benefits• Vehicle for savings

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

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

How Much Life Insurance Is Right For You?

Assess Family’s Total Economic Needs

• Family income• Additional expenses• Special needs of

dependents• Pay off debts• Liquidity

• Savings and investments• Social Security benefits• Pension or retirement plans• Other life insurance• Income of surviving spouse or children• Real estate or other assets

Determine Financial Resources

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

Subtract Resources From Needs

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

Types of Term Insurance

Straight term

Coverage remains the same while premiums can increase

Decreasing term

Premiums remain the same while coverage decreases

Important Features In Term Insurance

Renewability

Renew policy without evidence of insurability

Renewability

Renew policy without evidence of insurability

Convertibility

Convert to whole life policy without evidence of insurability

Convertibility

Convert to whole life policy without evidence of insurability

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

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

Whole Life Insurance

Cash value

Provides death protection plus a savings feature

Nonforfeiture right

Right to cash value when canceled prior to death

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

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

Types of Whole Life Policies

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

cancellationLimited payment• Level premiums paid for specified number

of years, insurance in force until deathSingle premium • Lifetime coverage purchased with a single

premium

Advantages of Whole Life

Advantages • Savings vehicle• Borrow against cash value • Premiums remain constant• Cash value accumulates tax-free

until redeemed

Disadvantages of Whole Life

Disadvantages • 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

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

Understand the risks before you buy!

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

Other Types of Life Insurance

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

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

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

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

Buying Life Insurance

• Compare costs and features

• Select a large, highly rated, financially secure company

• Choose a reputable agent

Key Features of Various Types of Life Insurance

Life Insurance Contract Features

Beneficiary clause

Settlement options

Policy loans

Premium payments

Grace period

Nonforfeiture options

Policy reinstatement

Change of policy

Other Policy Features

Multiple indemnityDisability clause

Guaranteed purchase optionsSuicide clause

ExclusionsParticipation

Living benefitsViatical Settlement